A couple who bought a £1m property in Surrey using an unlimited company to avoid stamp duty land tax (SDLT) have lost an appeal against HMRC.
Michael and Bridget Brown have now unsuccessfully appealed against HMRC’s demand for £38,200 in unpaid SDLT on no fewer than three occasions.
The Court of Appeal dismissed this latest case, finding that the couple used an SDLT tax avoidance scheme which involved several pre-planned steps to acquire the freehold of a £955,000 house in Cobham, Surrey.
The appeal by the Browns was dismissed at the First Tier Tribunal (FTT) and the Upper Tribunal, but for separate reasons, which is why the Browns went to the Court of Appeal.
Premier Strategies Limited (now dissolved) promoted the avoidance scheme to the Browns. It involved three phases for purchasing the property, starting with the Browns setting up an unlimited company, named Earlswood. This was incorporated on 7 June 2007.
Each of the Browns bought 47,751 shares for £1 each, totalling £95,502 in total. One week later Earlswood contacted the seller of 9 Earlswood, Cobham, Surrey, with an offer of £955,000 and paid a deposit of £95,000.
The property was then bought in August 2007 through Earlswood after the couple transferred the necessary funds to it in exchange for shares, valued at £1 each.
Once the transfer of the property had been made to Earlswood, it was then transferred to the Browns after the capital of the property had been reduced to £2.
Earlswood then issued 432,250 shares to each Brown worth £960,002 but then reduced the share capital 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’.
This method took advantage of sub-sale relief under section 45 of the Finance Act 2003 which states: ‘The contract between A (seller) and B (the unlimited company) is disregarded, and because there is no consideration for the distribution in specie from B to C (the purchaser), no SDLT is payable.’
Four years after the sale, HMRC contacted the Browns on 8 August 2011 with a notice of determination to inform them that they owed SDLT at 4% of the transaction, totalling £38,200.
Ross Birkbeck, the barrister instructed by the appellants, who was working pro bono for the couple, argued the two reasons HMRC used to have the appeal dismissed at earlier tribunals could not be relied upon. This was due to “procedural and administrative reasons”.
Judge Timothy Herrington and Mr Justice Trower said at the Upper Tribunal that the Browns ‘provided funds to the company which were used by the company to purchase the property’ and therefore indirectly fell under s45. The company was described as a “vehicle under their control” with the only reason for it being incorporated was to buy the property through the scheme.
The point of the couple being “connected people” to the company buying the property was not brought up by HMRC at the FTT leading Birkbeck to argue that this could not be brought up at the Court of Appeal.
Birkbeck also claimed that the Upper Tribunal had not given HMRC permission to bring this point up at the tribunal, which was not the case.
The Court of Appeal allowed this submission as “it is a pure point of law, it has wider implications for the proper assessment and collection of SDLT, it requires no further fact-finding, and it is conceded to be correct”.
Section 75A Part 4 of the Finance Act 2003 meant the judges decided “the real world acquisition of the freehold by Mr and Mrs Brown must be disregarded for the purposes of all those sections”.
“HMRC were entitled to make a determination of the amount of SDLT chargeable in respect of the transaction.”
The appeal was dismissed at the Court of Appeal by Lord Justice Males and Sir Andrew McFarlane, in line with the Upper Tribunal judge’s ruling.
