Fanning v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 21 January 2022 |
| Neutral Citation | [2022] UKUT 21 (TCC) |
| Year | 2022 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2022] UKUT 21 (TCC)
Mr Justice Miles, Judge Jonathan Richards
Upper Tribunal (Tax and Chancery Chamber)
Stamp duty land tax – FA 2003, s. 44, 45 and 46 – Whether an option falls within s. 45(1)(b) – No – Appeal dismissed.
Stamp duty land tax (SDLT) – Former subsale relief – FA 2003, s. 44 and former s. 45 – Avoidance scheme involving grant of option – Whether option fell within FA 2003, s. 45(1)(b) – No – Appeal dismissed.
Dismissing the taxpayer's appeal, held that the option granted as part of the subsale avoidance scheme used by the taxpayer was not an “assignment, subsale or other transaction” satisfying the requirements of former FA 2003, s. 45(1)(b).
The taxpayer purchased a property for a price of £5m (excluding chattels) and made use of an avoidance scheme designed expressly to exploit the temporary lacuna that opened up in the former s. 45 after the amendments made by FA 2012, s. 212 before it was closed by the amendments made by FA 2013, s. 194 specifically to nullify the scheme used in Fanning. The steps in the scheme were as follows:
- The vendor and the taxpayer entered into a contract for sale of the property to be completed by conveyance. This contract would fall within the terms of former s. 45(1)(a) (the original contract).
- Simultaneously, the taxpayer granted San Leon, a company of which he was the chairman but which he did not control, a call option over the chargeable interest in the property for a nominal consideration of £100 to purchase the property at full market value. The option was expected to be an an assignment, subsale or other transaction (relating to … the original contract) under which another person other than the purchaser becomes entitled to call for a conveyance to that person pursuant to former s. 45(1)(b).
- The property was occupied by the taxpayer, who had paid the full price under the original contract to the vendor.
- San Leon did not exercise the option and cooperated in the scheme. Former s. 45(3) would deem San Leon to be the purchaser and the option consideration as the deemed consideration for the secondary contract. The original contract would be disregarded for SDLT purposes.
- The result in this case was intended to be that until the option was exercised, SDLT was charged on the deemed consideration of £100 on a residential purchase price of £5m. The option was granted by the taxpayer to San Leon and was set to be exercisable between five and 15 years from grant. The option was not registered at the Land Registry.
An SDLT Return was filed with HMRC showing the purchase price and tax due as “nil” but without further explanation.
HMRC issued a discovery assessment in the sum of £250,000.
he FTT found, on the facts, that the grant of the option fell within the definition of “other transaction” in former s. 45(1)(b). The option was a valid agreement that gave San Leon the option to call for a conveyance of the property. There was no requirement that the right to call for a conveyance be immediate or unconditional.
Consequently, former s. 45 operated as if the grant of the option were the “secondary contract” under which the company was the purchaser. In addition, the taxpayer was not treated as connected with San Leon because he had no control over it. However, s. 45(3) disregarded the original contract only if its substantial performance or completion took place at the same time, and in connection with, the substantial performance or completion of the secondary contract.
First, under former s. 45(3), the secondary contract was not the grant of the option but a deemed land transaction where San Leon was the deemed purchaser and the subject-matter of the contract the subject-matter of the “transfer of rights” of the original contract for the property.
Applying FA 2003, s. 44, it was clear that the secondary contract had not been substantially performed because it had not been completed by a conveyance; San Leon had not taken possession and the taxpayer continued to have exclusive enjoyment of the property. There were two elements of consideration: one was the price paid under the grant of the option and the second was the payment to be given when the option was exercised and there was a “transfer of rights”. Therefore, a substantial amount of the aggregate consideration required had not been paid.
Before the Upper Tribunal (UT), the taxpayer argued that:
- The FTT had been wrong to conclude that the aggregate consideration for the secondary contract specified in former s. 45(3) was more than £100
- The FTT had been wrong to conclude that the secondary contract had not been substantially performed at the same time as the original contract
The taxpayer also appealed against the FTT's alternative decision that even if the scheme had worked as intended, it would have been rendered ineffective by the anti-avoidance rule in FA 2003, s. 75A, but for the reasons set out below, the UT did not need to consider the application of that rule.
Before dealing with the substantial issues, the UT held that it had the authority to allow HMRC to advance an argument that had failed before the FTT but against which it had not sought permission to appeal. That argument, which proved central to the UT's decision, was that the scheme option was not the “assignment, subsale or other transaction” posited by former s. 45(1)(b), and hence that the scheme failed to engage the former s. 45 at all.
It was common ground that the option was neither an assignment nor a subsale, so it had to be an “other transaction” in order to engage s. 45 at all. However, it was a requirement for any type of transaction listed in s. 45(1)(b) to be one as a result of which a person other the original purchaser became entitled to call for a conveyance. That condition had to be tested at the effective date of the transaction transferring the property to the taxpayer. At that time, San Leon had not exercised the option, nor was it even entitled to exercise the option, since the exercise period did not commence for another five years. On a natural interpretation of the words, the option therefore conferred no entitlement on San Leon to obtain a conveyance.
Furthermore, the kind of contingent entitlement to a conveyance that San Leon obtained was not sufficient to engage s. 45(1)(b). The function of former s. 45 was to build on FA 2003, s. 44 (which provided, and still provides, how a contract to be completed by a conveyance is to be treated for SDLT) by, inter alia, setting out the terms of the deemed secondary contract to which s. 44 could be applied. That section referenced an entitlement that was definite rather than contingent, whereas the “entitlement” that San Leon obtained under the option in this case was qualitatively different from that it would have obtained under a contract to which s. 44 applied.
Contrary to the finding of the FTT, the scheme therefore failed to engage former s. 45 and tax had therefore been correctly charged on the full purchase price, as the original contract was not to be disregarded. The appeal fell to be dismissed on this ground alone.
Although it was consequently unnecessary for the UT to rule on the taxpayer's two grounds of appeal, it nevertheless did so.
If, contrary to the UT's conclusion, the option did engage former s. 45, the consideration under that section for the secondary contract was £100 (the consideration for the option) plus the market-value payment that San Leon would have needed to pay on exercise of the option. Much of the taxpayer's reasoning on this ground was based on the proposition that the secondary contract and the option were one and the same. This was not so. The secondary contract was a deemed transaction constructed that s. 44 could be applied to it.
There were two elements of the consideration that former s. 45 treated as given for the secondary contract – namely
- so much of the consideration under the original contract (the sale of the property to the taxpayer) as was referable to the subject-matter (the property) of the transfer of rights (the option) and was to be given directly or indirectly by the transferee (San Leon) or a person connected with the transferee; and
- the consideration given for the transfer of rights
The UT agreed with the taxpayer that element (1) was zero, since no part of the purchase price paid for the sale of the property to the taxpayer was provided directly or indirectly by San Leon.
However, in determining element (2) of the consideration, one had to consider what was payable for a transfer of rights that entitled San Leon to call for a conveyance of the property. That entitlement could arise only if San Leon exercised the option and paid the property's market price at the time of exercise.
This would be £100 plus whatever the market value was at the time of exercise. There was therefore no error in the FTT's decision on this point, although it had arrived at it by a different route.
There had been no substantial performance or completion of the secondary contract at all, for the same reasons given by the FTT.
In reaching its decision, the UT rejected the taxpayer's attempt to apply the decision in Spiro v Glencrown Properties Ltd [1991] Ch 537, a property-law case. It also distinguished the facts of this case from those in Vardy Properties [2012] TC 02242.
The UT decision in this case, unless reversed by a hypothetical appeal to the High Court, is probably the death knell for the Fanning type of scheme, as it establishes that the scheme falls at the first hurdle, without the need to consider the consideration for the secondary contract otherwise posited by former s. 45.
A reminder that the lacuna the scheme sought to exploit existed between 17 July 2012, when...
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