Brown and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 07 June 2021 |
| Neutral Citation | [2021] UKFTT 208 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 208 (TC)
Judge Charles Hellier
Ross Birkbeck instructed by Blackfriars Tax Solutions LLP appeared for the appellant
David Street appeared for the respondents
Stamp Duty Land Tax (SDLT) – House sold to company and distributed to shareholders on reduction of capital – Quantum of consideration – FA 2003, Sch. 4, para. 1 – Whether former FA 2003, s. 45 applied – Yes – Quantum of consideration for notional contract – Whether FA 2003, s. 75A applied – Yes, contingently – Whether Tribunal had jurisdiction to hear appeal – Yes – Appeal dismissed.
In Brown [2021] TC 08158, the First-Tier Tribunal (“FTT”) found that the former FA 2003, s. 45 applied to a scheme whereby a house was transferred to the appellants by way of an in specie distribution on a reduction of capital, but that the chargeable consideration thereunder was the total paid by them to the company rather than nil, as they maintained. Furthermore, the FTT considered it had jurisdiction to hear the appellants' appeal against the HMRC determination (for a smaller amount), which it confirmed.
The sequence of events was as follows:
- The appellants, Mr & Mrs Brown, entered into a scheme to avoid paying SDLT on their purchase of a house in 2007.
- They subscribed for shares in an unlimited company for £95,502.
- The company entered into a contract to purchase the house for £955,000 and paid a deposit of £95,000.
- The company then issued further shares at par to the appellants, for a nominal value of £864,500.
- The company resolved to reduce its share capital from £960,002 to £2 by way of a distribution in specie of the house simultaneous with the completion of the house purchase. On the same day, it used the balance of the cash from the share subscriptions to complete the transfer of the house to it and transferred the house to the appellants for no (further) consideration
- The appellants made no land-transaction return on the basis that they had given no chargeable consideration for its transfer to them and it was therefore an exempt transaction
- Four years later, HMRC issued a notice of determination to the appellants in respect of their acquisition of the house, charging tax at the then-applicable rate of 4% on £955,000
- The appellants appealed against the determination
The scheme is similar to that used in Vardy Properties [2012] TC 02242, except that in Vardy, the transfer to the appellant was by way of an in specie dividend rather than pursuant to a reduction of capital.
FA 2003, s. 45 in the form it had in 2007 was subsequently amended and then completely replaced in 2013 by new FA 2003, s. 45 and Sch. 2A (“pre-completion transactions”). References to it in this report are to the version that existed in 2007.
On behalf of the appellants, it was argued that:
- FA 2003, s. 45 (sub-sale relief) did not apply and the appellants had no liability to tax on the transfer of the house to them as they had given no consideration for it
- If, on the contrary, FA 2003, s. 45 did apply, the chargeable consideration for the notional contract posited by that section was nil.
On behalf of HMRC, it was argued that:
- FA 2003, s. 45 did apply and the chargeable consideration under the notional contract was £955,000 (the amount in subscription monies applied by the company in purchasing the house).
- If it did not apply, the chargeable consideration for the transfer was still £955,000
- If FA 2003, s. 45 applied, but with the result that the chargeable consideration was nil, FA 2003, s. 75A would apply and the chargeable consideration would be £955,000 (the amount received by V, the vendor of the house)
In such a case, the only land transaction at issue would be the acquisition of the house by the appellants. Under FA 2003, Sch. 4, para. 1, the chargeable consideration for a land transaction was “any consideration in money or money's worth given for the subject-matter of the transaction, directly or indirectly, by the purchaser or a person connected with him.”
The use of the word “for” indicated a measure of intention or understanding that what was to be given was linked to the land receipt. Here, it was not possible to believe that the appellants had thought they would get the house without paying the subscription monies, neither did they not expect that they would get the house once they had paid them. What they paid was therefore “consideration” and that consideration was “for” the transfer of the house. Although the vendor received only £955,000, the appellants had paid £960,002 and that would therefore be the chargeable consideration for the transaction, in the absence of FA 2003, s. 45 and FA 2003, s. 75A.
Both relevant conditions for s. 45 to apply were met.
Section 45(1)(a) required there to be a contract for a land transaction (“the original contract”) under which the transaction would be completed by a conveyance. This was the contract under which the company agreed to purchase the house and the transaction was the company's envisaged acquisition of the house.
Section 45(1)(b) required there to be an assignment, subsale or other transaction whereby a person other than the purchaser under the original contract became entitled to call for a conveyance to him. In Vardy, the FTT had concluded that once the company had completed the purchase of the property, the appellant was entitled to call for a conveyance to it of the property. This was also the case here.
Where the section applied, it deemed there to be a notional contract (the “secondary contract”) under which the transferee was the purchaser and the consideration for the deemed transaction was [45(3)(b)](i) so much of the consideration under the original contract as was referable to the subject-matter of the transfer of rights and was to be given (directly or indirectly) by the transferee or a person connected with him and [45(3)(b)](ii) the consideration given for the transfer of rights. What is more, the substantial performance or completion of the original contract was to be disregarded.
The effect of s. 45(3) was to create a notional contract for a land transaction that completed on the transfer of the land to the appellants (the transferees). The appellants asserted that this transaction was exempt because it was a distribution in specie and so for no consideration, on the analogy of Project Blue Ltd v R & C Commrs [2018] BTC 23, in which the conveyance from Project Blue to the bank was exempt because it fell within the exemption for alternative-finance transactions under FA 2003, s. 71A. That was not the case here, however. The distribution in specie was not the nature of the transaction under the secondary contract, which was the conveyance to the appellants. There was no provision that exempted that transaction. If the consideration for it as determined by s. 45(3) was not nil, that was the consideration by reference to which the transaction was taxable.
Contrary to the element of potential double counting conceded by the FTT in Vardy, the amount of consideration under s. 45(3)(b)(i) had to be given (directly or indirectly) by the transferee for the subject-matter (or part of it) of the original contract. Here, the appellants had paid the company and the company had paid the vendor. The appellants had given no consideration under the contract between the vendor and the company, so the amount of consideration under s. 45(3)(b)(i) was nil. The only chargeable consideration was that given for the transfer of rights under s. 45(3)(b)(ii), if any.
Although s. 45(3)(b)(ii) made no reference to consideration given directly or indirectly, only to consideration given, in the context of a pre-planned scheme, one had to ask what did the appellants pay the company £960,002 for, if it was not to “get the house” pursuant to the arrangement? They may also have paid it to get the shares, but the question was what they paid “for” and that had to look to the reality of the purpose of the payers.
The actual distribution may have been made for no consideration, but the resolution to make it followed from the share subscription and would not have been passed without it. Realistically, the payment for the shares was also the quid pro quo for the resolution.
Accordingly, the consideration for the notional land transaction was the amount under s. 45(3)(b)(ii)given by the appellants in consideration for the resolution to reduce the company's share capital and convey the house to them. That amount was £960,002.
Section 75A was only of interest if the Tribunal's view of the chargeable consideration under s. 45(3)(b) was wrong and the consideration under that section was nil.
For s. 75A to apply, there had to be:
- a disposal of a chargeable interest by a person (V) and the acquisition of that interest or of an interest deriving from it by another person (P) and
- a number of transactions, including the disposal and acquisition, involved in connection with the disposal and acquisition (these were the scheme transactions)
In Project Blue Ltd, the FTT (at [2013] TC 02777) had considered that “involved in connection with” denoted some form of participation. In the mind of the Tribunal judge, this required some intention, plan or arrangement that the scheme transactions would serve in connection with the vesting of the property in P and its disposal by V.
In the Tribunal's view, there were five potential scheme transactions.
- The contract between the vendor and the company. Albeit not a land transaction, it was a transaction and one involved with the appellants' acquisition, given the preordained nature of the scheme.
- The subscription for shares in the company by the appellants. Whereas FA 2003, s. 75C(1) required a transfer of shares to be ignored, this did not apply to an issue of shares, and the issues were plainly involved in connection with the...
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