Hannover SDLT judgment. Game over for corporate property deals?
The transaction involved the sale by Greycoat of a London office property (30 Crown Place) to German fund Hannover. The property was held in a Guernsey unit trust structure and the sale structured as an acquisition of the units. Various steps were taken before and after the sale, involving two transfers of the property. First, to remove a partnership vehicle from under the unit trust, to ensure Hannover did not inherit liabilities of the partnership. Second, Hannover extracted the property from the unit trust after the sale completed, and subsequently transferred the property to a separate Hannover partnership vehicle. SDLT was not payable on the acquisition of the unit trust, and the restructuring steps gave rise to only a small amount of SDLT under the rules for transactions with partnerships.
The court found that the restructuring steps, combined with the SDLT-free sale of the unit trust, triggered the SDLT anti-avoidance rule known as section 75A. This rule applies where property is transferred as part of a series of transactions, and less SDLT is paid under the series than would be on a “notional transfer”. The notional transfer effectively ignores the various steps and is treated as a transfer by the entity holding the property at the beginning of the steps, to the entity holding it at the end, with SDLT payable on the largest amount of consideration actually paid under the transaction. In this case the price paid by Hannover for the unit trust was c£138m, and the SDLT bill over £5m.
Following the Supreme Court judgment in the Project Blue case last year, which found that section 75A applied to the SDLT scheme used by Qatari Diar on their acquisition of Chelsea Barracks, there has been concern about the scope of this provision. However, unlike the Qatari transaction, which involved a combination of SDLT reliefs in a scheme that HMRC always viewed as avoidance, SDLT in the Hannover transaction was saved by the sale being structured as a corporate rather than an asset deal, which has long been accepted by HMRC as a legitimate way to manage SDLT.
There are several striking things about this judgment:
- the restructuring steps that occurred before and after the sale were largely not motivated by tax, and there was no suggestion that, outside of section 75A, structuring a property acquisition as a corporate deal to save SDLT is, on its own, avoidance. In the Project Blue judgment the court held that there does not need to be an avoidance motive for section 75A to apply. Hannover agreed that section 75A did not require any avoidance to have been intended but argued that it did, at the least, require there to be avoidance in the first place. In this case, no-one considered that the SDLT savings on the sale of units comprised avoidance. Indeed, the only reason that section 75A applied at all was because there were various steps taken either side of the unit sale, involving transfers of the property, which the court accepted were generally unrelated to tax;
- HMRC has long accepted that acquiring a property in a corporate wrapper is acceptable tax planning. In 2013 they confirmed that where a purchaser acquires a property in a corporate wrapper and immediately hives up the property into a different group vehicle, this is not avoidance. Reflecting this, section 75A contains a carve out for series of transactions that result in an SDLT saving where the first in the series is the acquisition of a company or unit trust. The point was made in the case that if the Hannover steps had taken place in a different order HMRC could have lost. It seems bizarre that an anti-avoidance provision, that works by ignoring artificial steps and taxing the substance of a transaction, can not only be switched off simply by re-ordering the steps of a transaction but can apply solely as a result of steps that are irrelevant to the tax position and are prompted by genuine commercial issues;
- further, the judgment suggests that when assessing whether there is a series of transactions to which section 75A could apply, all steps taken by the parties will count, including for example loans made to finance the transaction. Most corporate transactions involve multiple steps, for example to hive out from the target assets that are to be retained by the vendor, or remove intra-group indebtedness, and a purchaser will often move the property post-acquisition into another vehicle for a variety of reasons, usually not related to SDLT. In light of this it is often hard to conclude that the first step in a transaction is the acquisition of shares. The judgment suggests that any corporate transaction that involves a transfer of the property either before or after the corporate sale, could be vulnerable to section 75A;
- perhaps the most striking issue is that HMRC decided to challenge this transaction at all. They have long accepted that sales structured as corporate acquisitions are legitimate. Although the Project Blue case found that HMRC does not have discretion to apply section 75A to cases where they perceive there to be avoidance (which is what its guidance says it will do), ultimately HMRC can choose which cases to challenge, so it is odd that it picked on the Hannover one. Naturally this will raise concerns among taxpayers who have done similar transactions; and
- the court described section 75A as “yet another” example of HMRC seeking to narrow by guidance legislation that, on its face, operates too broadly. This is not an issue just in relation to section 75A but much of recent legislation. This case highlights that legal certainty cannot be substituted for assurances from HMRC as to how those rules will supposedly be applied. It may therefore be a hollow victory for HMRC if it serves to erode the trust between taxpayer and tax authority that is necessary for any functioning tax system.
Given the precedent this case could set, there will be more interest than usual in whether this case is appealed. In the meantime the judgment will be a source of uncertainty for the industry.