Sun reflecting on RPC building.

The Upper Tribunal dismisses HMRC’s appeal in SDLT sub-sale mitigation case

14 November 2012. Published by Adam Craggs, Partner

The Upper Tribunal (Henderson J) has dismissed HMRC’s appeal in HMRC v DV3 RS Limited Partnership [2012] UKUT 399 (TCC), a stamp duty land tax (‘SDLT’) mitigation case involving a sub-sale to a partnership.

The facts

In July 2005 a company incorporated in the British Virgin Islands, DV3 Regent Street Limited (‘the Company’), acquired a leasehold interest in the Dickins and Jones building on Regent Street in London (‘the Property’). The lease was due to expire in June 2038. On 24 October 2006, the Company entered into a contract with the owner of the head leasehold interest in the Property, Legal and General Assurance Society Limited (‘L&G’), to buy that interest from L&G for £65.1 million. Completion was to take place on 4 December 2006 (in the event, completion took place on 5 December 2006 but nothing turns on this). The terms of the contract enabled, but did not oblige, the Company to require L&G to transfer the Property directly to a third-party, or to enter into a sub-sale transfer with the Company and one or more third parties.

Had the contract been completed either by a transfer of the Property from L&G to the Company, or by a transfer directly from L&G to a third party nominee of, or sub-purchaser from, the Company, SDLT would have been payable by the person acquiring the Property at the rate of 4% of the full consideration of £65.1 million (ie £2,604,000).

However, that is not what happened. On 29 November 2006 a limited partnership was created under British Virgin Islands law called DV3 RS Limited Partnership (‘the Partnership’). Its partners were the Company (entitled to 98% of the income of the Partnership), three other companies (two of which were the general partners) and a corporate trustee of a unit trust (each entitled to 0.5% of the income of the Partnership). Due to the inclusion of the unit trust, the partners were not all ‘bodies corporate’ for the purposes of paragraph 13 of Schedule 15, Finance Act 2003.

On 30 November 2006 a contract of sub-sale was entered into between the Company as vendor and the two general partners of the Partnership acting on its behalf as purchaser, whereby the Company agreed to sell the head leasehold interest in the Property to the Partnership for £65.1 million, with completion due on 4 December 2006.

Completion of the original sale and of the sub-sale took place at a single meeting on 5 December 2006. Two forms of transfer were executed, the first from L&G to the Company and the second from the Company to the Partnership.

The arrangements were designed to take advantage of sections 44 and 45 of Finance Act 2003 and to ensure that the sub-sale by the Company to the Partnership fell within paragraph 10 of Schedule 15, Finance Act 2003.

The decision

The taxpayer’s appeal was allowed by the First-tier Tribunal and HMRC appealed to the Upper Tribunal.

Before the Upper Tribunal, the Partnership argued that the sub-sale fell within the terms of paragraph 10 and nothing in Finance Act 2003 altered that analysis. HMRC’s main contention was that paragraph 10 has to be read and applied in the context of the Act as a whole and that the effect of sections 44 and 45 is to eliminate the Company as the transferor of a chargeable interest to the Partnership with the consequence that the provisions of Schedule 10 are not engaged.

The Upper Tribunal had little difficulty in dismissing HMRC’s appeal.

The Upper Tribunal began by summarising the legal background. The key provisions in question were sections 44 and 45 and paragraph 10, Schedule 15, Finance Act 2003. Under section 44, a purchaser is regarded as entering into a land transaction only on completion, not when the contract is made. Section 45 deals with a wide variety of different factual circumstances, the common features of which are:

(a) there is an original contract, which is due to be completed by a conveyance; and

(b) as a result of a further transaction relating to the whole or part of the subject-matter of the original contract, somebody other than the original purchaser becomes entitled to call for a conveyance.

Under section 45 there is a limited deeming provision by which a charge to tax is imposed on a partly fictional secondary contract when that secondary contract is completed. This charge replaces the charge which would otherwise arise under the actual original contract.

Under paragraph 10, Schedule 15, the chargeable consideration for the sub-sale by the Company to the Partnership is nil, on the assumption that the transaction does fall within the scope of paragraph 10.

The Upper Tribunal then analysed the arguments raised by the parties. HMRC had argued that the Company could not be regarded as the vendor or transferor of the head lease to the Partnership because the original contract between L&G and the Company did not give rise to a chargeable transaction under section 44(2) and since completion of the original contract had to be disregarded by virtue of section 45(3), it must follow that for SDLT purposes the Company never acquired a chargeable interest which it could transfer to the Partnership. Accordingly, there was no transfer by the Company to the Partnership within paragraph 10, Schedule 15 and thus nothing to displace the charge to tax on completion of the secondary contract on the full consideration of £65.1 million.

In the tribunal’s view, however, the Company must be regarded as the vendor under the secondary contract. The learned judge said at paragraph 66:

It seems reasonably clear to me that the draftsman begins by referring to a factual state of affairs in the real world, and then constructs a hypothesis which in certain limited respects modifies that state of affairs. The sub-sale by the Company to the Partnership forms part of the real state of affairs, and I can find nothing in the statutory hypothesis which requires it to be displaced. The purpose of the disregard of the completion of the original contract has nothing to do with the real world state of affairs from which the hypothesis of the secondary contract is constructed, but is rather to ensure that there is only one charge to SDLT if the original contract and the secondary contract are completed at the same time. I am unable to see any grounds for giving it a wider or more general effect, and still less for using it to undermine or modify the factual basis of the secondary contract.” (my emphasis).

As a result, the Upper Tribunal preferred the arguments of the Partnership and concluded that the seller under the secondary contract must be the Company and not L&G and therefore the arrangements were effective as paragraph 10, Schedule 15 duly applied and there was no charge to SDLT. The Upper Tribunal commented at paragraph 67, that:

This result is no doubt one that Parliament would not consciously have intended had the facts of the present case been drawn to its intention. But, in respectful agreement with the FTT, 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.


This decision is significant because it is the first challenge to SDLT planning that has reached the Upper Tribunal and it may have wide ramifications for other SDLT tax planning which is presently under challenge by HMRC. Although it is not known whether HMRC will seek to appeal the decision to the Court of Appeal, given the level of political and media interest in tax avoidance in general and SDLT avoidance in particular, it would be surprising if HMRC did not seek permission to appeal. Of course, given that HMRC’s arguments have now been rejected by two levels of the judiciary, it is by no means certain that they will be given permission to appeal further. In this instance, HMRC might do well to head the words of Mr Justice Henderson and accept that the tax result relied upon by the taxpayer simply “follows from a proper construction of the relevant statutory provisions“.