A recent tribunal case on the stamp duty land tax treatment of a transfer in return for an annuity deals with market value rules which apply both for the transfer of a property to a connected company and on an exchange properties. It also considers the anti-avoidance rules in the Finance Act 2003 Section 75A.
The First Tier Tribunal decision in the case of M & M Builders (Norfolk) Ltd v HMRC was released on 19 August 2019. It deals with the stamp duty land tax (SDLT) treatment of properties acquired in return for an annuity, the rule that SDLT is due on the market value of a property where it is acquired by a connected company, the land exchange rules and the anti-avoidance rules in Finance Act 2003 section 75A.
A narrow interpretation given to the land exchange rules is of particular interest and is considered below, though the issue was not central to the decision made by the Tribunal.
A simplified version of the facts is as follows. Mr and Mrs F owned a residential property worth £1.2M (Property A) and transferred it to a company they controlled, M & M Builders (Norfolk) Ltd (the Company), by a transfer dated 31 March 2016 expressed to be in return for an annuity of £3,000 per annum.
On the same day the Company transferred to Mr and Mrs F another residential property (Property B) worth £1M, the transfer stating that it was in return for an annuity for £2,500 per annum.
31 March 2016 was the day before the higher rates of SDLT (the extra 3% for additional properties) came into effect. There were no prior contracts. The Tribunal did not see any other papers evidencing the annuities.
Land transaction returns were made in August 2016, stating the chargeable consideration for Property A as £36,000, using the special rule in Finance Act 2003 section 52 that where the consideration is annuity, the chargeable consideration is limited to the first 12 payments. The chargeable consideration in the return for Property B was stated as £30,000 on the same basis.
HMRC opened an enquiry into the return for Property A (but not property B) and on 16 August 2018 issued a closure notice, amending the return to show SDLT due on chargeable consideration of £1.2M. The decision does not say, but presumably HMRC assessed the transfer of Property A to £63,750 of SDLT. This case was an appeal against that closure notice.
Market value rule for acquisitions by connected companies
It did not take the Tribunal much analysis to conclude that the transfer of Property A to the Company got caught by the market value in Finance Act 2003 section 53 which can apply where a property is transferred to a connected company. They decided that this rule, where it applies, takes precedence to the special rule in section 52 about quantifying the chargeable consideration where the consideration consists of an annuity.
That was enough to decide the appeal (as it was only the transfer of Property A which was being considered), but the Tribunal went on to consider other arguments.
Land exchange rules
A market value rule also applies where land transactions are entered into in consideration of each other, see Finance Act 2003 section 47. Here on the same day:
- Mr and Mrs F had transferred Property A to the Company, the transfer saying it was in return for an annuity for £3,000 pa.
- The Company had transferred Property B to Mr and Mrs F, the transfer saying it was in return for an annuity for £2,500 pa.
Had the Tribunal been considering the SDLT liability of Property B, this rule would have been of key relevance, because the section 53 market value for a transfer to a connected company would not have applied.
The Tribunal decision appears (at least on my reading) to accept that section 47(2) limits the exchange rule to cases where there is an “obligation to give consideration for a land transaction” by entering into another transaction (as suggested in Marc Selby’s article in the Tax Journal of 25 February 2011; a view which he still stands by).
HMRC’s published view has been that the main charging provision in section 47(1) is not limited by section 47(2) but can apply where one land transaction is in “consideration” of the other in a much wider sense. HMRC’s opinion was stated in SDLT Technical News Issue 5 of August 2007 (republished in the Stamp Taxes Bulletin of November 2010). The Tax Bulletin says that it “is the element of reciprocity and mutuality or quid pro quo or give and take that is crucial”. The Bulletin refers with approval to the stamp duty case of Glenrothes as to the meaning of “consideration” which goes well beyond cases where there is an obligation to enter another land transaction.
Before the introduction of SDLT in 2003, it had been possible to structure a transaction as the “purchase” of the more valuable property in return for a price, part of which could be satisfied by the transfer of a less valuable property. It was accepted for the old stamp duty that this did not amount to an exchange of properties, so the conveyance of the less valuable property escaped stamp duty. It is thought that section 47(2) was included to displace this rule and make both acquisitions liable to SDLT under the exchange rules. Viewed in this context there is a strong case for saying that s47(1) has a broader application than the circumstances specified in section 47(2).
However, the Tribunal (at para 70 of their judgment) say: “The Tribunal has considered whether to assume an obligation in the absence of evidence that no such obligation arises. ….. it is more likely than not that the obligations arising under the [Property A] Transaction were that the chargeable interest was transferred in consideration for the benefit of the related annuity and similarly that the obligations under the [Property B] Transaction were for the transfer of the chargeable interest in consideration for the benefit of the related annuity and not by reference to any obligation arising between the two transactions”.
The Tribunal found on this basis the transactions did not represent an exchange for the purposes of section 47. Some find this rather surprising, but it does not affect the final decision.
Anti-avoidance rules in FA 2003 section 75A
HMRC had asserted that the “scheme transactions” for section 75A were the transfer of Property A and the annuity contract. The Tribunal however concluded (para 89 of their judgment) that “it cannot be said that the annuity contract and transfer of [Property A] can comprise a number of transactions …. the annuity contract is the consideration for the transfer of the chargeable interest and therefore from both a land law and contract law perspective together they form a single transaction.”
The Tribunal did not consider fully the issue of whether the two transfers (of Property A and of Property B) could comprise a “scheme” for section 75A. This was on the basis that the decision on s53 disposes of the issue.
The scope of section 75A is currently one of the most complex areas of SDLT and a note at the top of HMRC’s guidance at SDLTM09050 says it is presently subject to review in the light of the Project Blue case. HMRC are now however prepared to answer questions on the operation of s75A sent in by email using the link at the top of that page.
The decision is being appealed to the Upper Tribunal (Tax and Chancery) under reference UT/2019/0165. A one and a half day hearing in London has been listed within a three day window to start on 1, 2 or 3 February 2021.
This article is intended for general information purposes only and does not constitute legal or professional advice. Advice should be sought before proceeding with any transaction.
Originally posted by John Shallcross on 4 September 2019 and updated on 27 April 2020.
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