AN UPPER-TIER TRIBUNAL has ruled that a mechanism used by a company to mitigate stamp duty land tax was legitimate, and as a result nothing was due to HM Revenue & Customs.
In July 2005, a British Virgin Islands-incorporated company called DV3 acquired an interest in what was formerly the Dickins & Jones building on Regent Street in London. In October 2006, the company entered into a contract with the owner of the leasehold, Legal & General Assurance Society, to buy that interest for £65.1m.
That contract allowed DV3 to require L&G to transfer the property to a third party, or to enter into a sub-sale transfer with DV3 and one or more third parties. Had any of those transactions taken place, stamp duty land tax would have been due at 4%, equating to about £2.6m.
Instead, a partnership was set up, and a contract of sub-sale between DV3 and the partnership was entered into, with the partnership agreeing to buy the leasehold for the same price of £65.1m without deposit and completion on the same day.
The partnership was structured in such a way that DV3 was entitled to 98% of its income. The other four partners – two general partners, another related company, and the trustees of a unit trust – were all connected with the company for the purposes of the partnership provisions relating to SDLT. The inclusion of the unit trust meant not all partners were considered "bodies corporate".
The final critical part of the plan was that the sub-sale should be completed by a separate transfer from the DV3 to the partnership, and not by a transfer made directly to the partnership by the original vendor under the first contract, L&G.
As a result, no stamp duty land tax was chargeable on the making of either of the two contracts for the sale and the sub-sale, nor was it chargeable on the completion of the first sale by L&G to DV3.
In summing up, judge Mr Justice Henderson said: "The loophole of which the company and the partnership have ... succeeded in taking advantage was open for only a short period, and it appears to reflect a period of considerable legislative uncertainty about how to deal with transfers involving a partnership.
"This result is no doubt one that parliament would not consciously have intended had the facts of the present case been drawn to its attention. But I consider that this is the result which follows from a proper construction of the relevant statutory provisions and their application to the undisputed facts."
Mayer Brown tax partner Peter Steiner added that following a recent HMRC victory in a similar case, many might be surprised at Mr Justice Henderson's decision.
He added: "However, the judge in DV3 did say rather ominously that if the subsequently introduced SDLT steps anti-avoidance rules had applied, then DV3 would not in all probability have succeeded.
"HMRC has in any event announced a tightening of its anti-avoidance procedures in relation to SDLT, meaning that it will be necessary for more avoidance scheme promoters and users to report use of avoidance structures. Clearly, SDLT avoidance is in HMRC's sights and anyone considering using an avoidance scheme should think very carefully about it and obtain professional advice."
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