Michael Brown Bridget Brown v The Commissioners for HM Revenue & Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lewison,Lord Justice Males,Sir Andrew McFarlane |
| Judgment Date | 08 February 2024 |
| Neutral Citation | [2024] EWCA Civ 92 |
| Court | Court of Appeal (Civil Division) |
| Year | 2024 |
| Docket Number | Case No: CA-2023-000118 |
[2024] EWCA Civ 92
THE PRESIDENT OF THE FAMILY DIVISION
Lord Justice Lewison
and
Lord Justice Males
Case No: CA-2023-000118
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
The Hon. Mr Justice Trower and Judge Timothy Herrington
UT-2021-000174
Royal Courts of Justice
Strand, London, WC2A 2LL
Ross Birkbeck (instructed under direct access) for the Appellants
Ben Elliott (instructed by HMRC Solicitors) for the Respondent
Hearing date: 31/01/2024
Approved Judgment
This judgment was handed down remotely at 10.30am on 08/02/2024 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
Introduction
Mr and Mrs Brown acquired the freehold of a house in Surrey as the last step in a series of pre-planned steps in a scheme which, it is said, allowed them to acquire the house without having to pay stamp duty land tax (“SDLT”). The scheme was marketed specifically for the purpose of avoiding SDLT. The question for us is whether the scheme achieved its objective. Both the FTT (Judge Hellier) and the Upper Tribunal (Trower J and Judge Herrington) said no, but for different reasons. The decision of the UT is at [2022] UKUT 00298 (UT), [2023] 4 WLR 11.
The scheme
Under this scheme the ultimate purchaser (“C”) acquires a property from an unconnected vendor (“A”) via an unlimited company (“B”). In summary the scheme works as follows:
i) C forms an unlimited company, B, and contributes cash to the unlimited company of a sufficient amount to purchase the target property. The contribution of funds is effected by subscribing for shares in B;
ii) A contracts to sell the property to B;
iii) B pays the agreed purchase price for the property to A. At the same time as the completion of the contract between A and B, B reduces its capital and makes a distribution in specie of the property to C. A executes a transfer to B, and B simultaneously executes a transfer to C.
The legal underpinnings of the scheme relied on the sub-sale relief then contained in section 45 of the Finance Act 2003. Thus, the theory was that by virtue of section 45 the contract between A and B is disregarded, and because there is no consideration for the distribution in specie from B to C, no SDLT is payable.
Premier Strategies Ltd put the scheme to Mr and Mrs Brown in a letter of 7 June 2007. The first step was to establish an unlimited company. The remaining steps were then described. Mr and Mrs Brown were to use “the deposit monies” to subscribe for shares. The company would then contract to buy the property. Following exchange of contracts, the company “will resolve to reduce its share capital by way of a distribution in specie” conditional on and simultaneous with completion. Before completion Mr and Mrs Brown would subscribe for further shares using a promissory note. They would then hold shares “equal in value to the price to be paid for the property”. On the day of completion, the solicitor would pay the mortgage monies to the vendor. At that point the distribution would take place “and the property will be transferred from the company to you”.
The intended tax consequences were set out in the proposal. On the question of SDLT it said:
“ SDLT — provided that the transfer of the property from the unlimited company to yourself occurs simultaneously with the completion of the contract between the vendor and the unlimited company the consideration paid by the unlimited company should not be chargeable to SDLT. We have Counsel's Opinion to say that in his view this should be the case provided that the first contract in which the vendor is involved is not connected to the second contract, of which the vendor is unaware. The transfer of the property to you by way of a distribution in specie will be a chargeable transfer, but because there will be no consideration paid in respect of this transfer no actual SDLT should be payable.”
The facts
The scheme was duly put into operation in the following steps.
On 2 July 2007, Earlswood (“the Company”) was incorporated as an unlimited company. Mr and Mrs Brown each subscribed for 47,751 £1 shares at par, paying £95,502 in total.
On 9 July 2007, the Company contracted with an unconnected third party (Mr Hamm) to purchase 9 Earlswood, Cobham, Surrey (“the Property”), for £955,000 and paid a deposit of £95,000.
On 8 August 2007, the Company issued to each of Mr and Mrs Brown a further 432,250 £1 shares at par (bringing the total nominal value of shares in issue to £960,002). The shares were subscribed for in return for promissory notes of £432,250 from each of Mr and Mrs Brown which were expressed to be payable on 15 August 2007 (the day of completion of the Company's purchase).
On 15 August 2007: (a) The Company resolved to reduce its share capital from £960,002 to £2 by way of a distribution in specie of the Property conditional on and simultaneous with the completion of its original property purchase contract. (b) The Company used the balance of the money deriving from the share subscriptions to complete the transfer of the Property to it and a transfer was executed in its favour. Specifically, the mortgage monies to fund the purchase of the Property were borrowed by Mr and Mrs Brown, paid to their conveyancing solicitor for the account of the Company and then paid by the conveyancing solicitor to the vendor, which thereby satisfied the promissory notes. The balance of the subscription monies after satisfaction of the purchase price for the Property were consumed in conveyancing costs. (c) A transfer of the Property from the Company to Mr and Mrs Brown was executed showing no consideration, and the Company's share capital was reduced. The borrowings were secured on the freehold by a legal charge, under which Mr and Mrs Brown were the mortgagors.
All the above steps were taken in pursuance of the scheme described to Mr and Mrs Brown, and from the time that the Company contracted to purchase the Property, there was no practical likelihood that the remaining steps would not be taken (unless some problem with the conveyancing occurred such as a defect in title).
The Company filed a land transaction return claiming relief from SDLT. Mr and Mrs Brown made no land transaction return on the basis that no chargeable consideration had been given for the transfer of the Property to them, so none was required.
Mr and Mrs Brown were registered as proprietors of the Property at HM Land Registry on 11 September 2007. The register recorded: “the price stated to have been paid on 15 August 2007 was 955,000.”
On 8 August 2011, HMRC issued a notice of determination to Mr and Mrs Brown. The covering letter stated:
“I have examined HMRC, Land Registry and Companies House records and concluded that the acquisition of this land/property is a chargeable transaction, and accordingly a land transaction return should have been made. I hold no records of a Land Transaction return being submitted for your acquisition of this land/property.”
The determination itself stated:
“ Revenue determination under paragraph 25 Schedule 10 Finance Act 2003 Acquisition of 9 Earlswood, Earlswood Corner, Fairmile Lane, Cobham Surrey, KT11 2BZ on 15/08/2007
This Revenue determination is being made as we have no record of a land transaction return being filed for your acquisition of this land/property. I have concluded to the best of my information and belief that there was a chargeable transaction and the appropriate consideration is as below.”
The stated consideration was £955,000 (i.e. the aggregate purchase price of the Property). The amount of SDLT was assessed at £38,200.
The appeal
With my permission Mr and Mrs Brown appeal. The appeal was very well argued on both sides, by Mr Birkbeck, appearing pro bono for Mr and Mrs Brown; and Mr Elliott appearing for HMRC. At the outset of his submissions, Mr Birkbeck candidly said that the scheme did not work for two substantive reasons, but that for procedural and administrative reasons, HMRC were not entitled to rely on either of those substantive reasons. I will come to both the substantive and the procedural reasons in due course.
SDLT
SDLT was introduced by Part 4 of the Finance Act 2003 in order to replace stamp duty, which had become notorious for the ease with which it could be avoided. As stated in the Explanatory Notes to the bill which eventually became the Finance Act 2003:
“A main driver for reform has been the increased use of avoidance devices to mitigate the charge to stamp duty. The Government is committed to preventing avoidance and the new legislation is designed to ensure all purchasers of property pay their fair share of tax.”
Whereas stamp duty was a tax on instruments, SDLT is a tax on transactions. All references to sections are to sections of the Finance Act 2003 as it stood at the time of the relevant events. It has since been amended.
Section 42 provides:
“(1) A tax (to be known as “stamp duty land tax”) shall be charged in accordance with this Part on land transactions.
(2) The tax is chargeable—
(a) whether or not there is any instrument effecting the transaction,
(b) if there is such an instrument, whether or not it is executed in the United Kingdom, and
(c) whether or not any party to the transaction is present, or resident, in the United Kingdom.”
A “land transaction” is defined by section 43:
“(1) In this Part a “land transaction” means any acquisition of a chargeable interest. As to the meaning of “chargeable interest” see section 48.
(2) Except as otherwise provided, this Part applies however the acquisition is effected, whether by act of the parties, by order of...
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