Taxation – Stamp duty land tax – Option – Appellant taxpayer appealing against decision of First-tier Tribunal dismissing appeal against discovery assessment in respect of SDLT chargeable on purchase of residential property — Whether option granted to third party falling within section 45(1)(b) of Finance Act 2003 – Appeal dismissed
G Ltd, as vendor, and the appellant, as purchaser, entered into an agreement (the V-F agreement) for the purchase and sale of a residential property for £5m.
A stamp duty land tax (SDLT) scheme was set up under which the vendor (V) and the appellant purchaser (F) entered into a contract for the sale of a chargeable interest in land to be completed by a conveyance. At the same time as the completion of the V-F contract of sale, the appellant granted a company (SL) an option to purchase the property for its market value in consideration of the payment of £100 to him. The appellant occupied the property having paid the full purchase price under the V-F contract of sale.
At the time of those transactions, the appellant was the executive chairman of SL and subsequently became its chief executive officer. However, SL was not “connected” with the appellant for any relevant tax purpose. It could not be assumed that SL would exercise the option and its decision would be its own and not dictated by the appellant.
In September 2011, a SDLT return was filed within days of completion of the property purchase reporting a nil SDLT liability. It was common ground that, if the option was not executed, the transfer of the property to the appellant would be a land transaction attracting SDLT at the rate of 5% of the purchase paid. However, the appellant considered that the grant of the option would reduce the SDLT payable because of the subsale relief provisions in section 45(3) of the Finance Act 2003.
The appellant appealed to the First-tier Tribunal (FTT) against a discovery assessment issued by the respondent commissioners in the sum of £250,000. The FTT dismissed the appeal holding that the SDLT avoidance scheme he had implemented was ineffective. The appellant appealed.
Held: The appeal was dismissed.
(1) Section 44 of the 2003 Act focused on a typical situation arising in property transactions where there was a contract that “is to be completed by a conveyance”: section 44(1). Section 44 was not concerned with options which might result in a conveyance and instead options were dealt with in section 46. In a case falling within section 44, the starting point was that the contract was not a “land transaction”: section 44(2). But nothing prevented the conveyance under that contract from being a land transaction.
Section 45 built on and supplemented section 44. It dealt with the situation where there was a contract falling within section 44 but a party to that contract effected an assignment of its rights under the contract, or something similar.
The purpose of section 45 was to modify the operation of section 44. Both sections contained deeming provisions that treated certain events or transactions as occurring, and specified characteristics of those deemed transactions which determined, among other matters, whether particular transactions attracted SDLT, the amount of SDLT payable and the “effective date” of the deemed transactions which determined the due date for payment of SDLT.
(2) In the factual context of this appeal, section 45(1)(b) was asking whether the option was “an assignment, subsale or other transaction (relating to the whole or part of the [property] as a result of which a person other than [the appellant] becomes entitled to call for a conveyance to him”. It was common ground that the option was neither an “assignment” nor a “subsale” and so the relevant question was whether it was an “other transaction” of the kind referred to in section 45(1)(b).
The conditions in section 45(1)(b) had to be tested on 16 September 2011, the date on which the Forms TR1 were executed transferring the property to the appellant since its satisfaction or otherwise had a bearing on whether SDLT was chargeable on those transfers. At that time SL had not exercised the option. Nor was it even entitled to exercise the option since the exercise period did not start until five years later. On a natural interpretation of the words, the option conferred no “entitlement” on SL to obtain a conveyance of the property.
There were clear indications on the face of the statutory provision that the kind of contingent future entitlement to a conveyance of the property that SL obtained under the option was not sufficient to engage section 45(1)(b). The function of section 45 was to build on section 44 by, among matters, setting out the terms of a deemed “secondary contract” to which the provisions of section 44 could be applied. Section 44 in turn was concerned with a contract which “is to be completed” by a conveyance, clearly referencing an entitlement that was definite rather than contingent.
(3) For section 45(1)(a) to apply, there had similarly to be a contract which “is to be completed” by a conveyance. It followed that, the “assignment, subsale or other transaction” falling within section 45(1)(b) had to involve a similar “entitlement” to obtain a conveyance as that arising under contracts to which section 44 applied. The definitions of “transferor” and “transferee” emphasised that point: the “transferee” was to obtain an entitlement to a conveyance which was similar in nature to the entitlement formerly held by the “transferor”.
The “entitlement” to a conveyance that SL obtained under the option, being contingent in nature, was qualitatively different from that it would have obtained under a contract to which section 44 applied. The option, therefore, did not confer the kind of “entitlement” to which section 45(1)(b) applied.
(4) Accordingly, the option in the present case did not satisfy the requirements of section 45(1)(b) of the 2003 Act. (The position had now been put beyond doubt by section 45(1A) which provided expressly that with effect from 21 March 2012, the grant or assignment of an option did not fall within section 45(1)(b)).
Since section 45(1)(b) was not engaged, the tailpiece to section 45(3) did not operate to disregard the transfer of the property to the appellant. Accordingly, SDLT was correctly charged on that transfer by the respondents’ discovery assessment.
Julian Hickey (instructed by Levy & Levy, of Stanmore) appeared for the appellant; Elizabeth Wilson QC (instructed by the General Counsel and Solicitor for HM Revenue and Customs) appeared for the respondents.
Eileen O’Grady, barrister
Click here to read a transcript of Fanning v Commissioners of HM Revenue and Customs
