Stamp duty tax on corporate acquisitions of residential property: the availability of relief

The recent First-tier Tax Tribunal judgment in the case of Investment and Securities Trust (IST) highlights the need for care to be taken where a company acquires a dwelling for more than £500k. This is because, potentially, unless relief is available, Stamp Duty Land Tax (SDLT) will be chargeable at a flat rate of 15% (or 17% if the purchaser is a non-resident) on the full purchase price and Annual Tax on Enveloped Dwellings (ATED) will be payable while the company holds the property.

The First-tier Tax Tribunal, noting that the flat 15% charge was introduced to counter SDLT avoidance (in the form of enveloping, i.e. acquiring a high-value residential property using a company to act as a special purpose vehicle (SPV), then selling the shares in that company rather than the property to avoid SDLT being chargeable), confirmed that the terms of the relief are to be construed narrowly.

Details of the IST case

In this case, IST, a property developer and trader, took an option over residential property owned and occupied by a director of IST. An option agreement is a contract between the owner of a property and a potential buyer, giving the buyer the right to serve notice upon the seller to sell the property either at an agreed price or at its market value. The option premium (£4.65m) formed 50% of the purchase price and the option, which was granted on 27 March 2014, was exercisable in a three-month period beginning on the fifth anniversary of the date of the option agreement. The purpose of the option period was to allow sufficient time for planning permission to be obtained in the expectation that, with planning permission granted, the property could be acquired and developed by IST and sold at significant profit in the course of its trade.

While planning permission was granted in April 2017, with an unexpectedly low valuation in March 2019 precluding finance for the development works, the property development project ceased to be viable and IST therefore pulled the plug on it. IST exercised its option and acquired the property in July 2019, self-assessing to SDLT at (the then applicable rate of) 7% (rather than the flat 15%), and rather than assume development risk, sold the property for much less than the initial asking price.

Is relief from 15% SDLT and ATED charge available?

HMRC enquired into IST’s claim for relief from both ATED and the 15% SDLT charge in respect of its acquisition of the option and the ongoing holding of that option (as a “chargeable interest” for the purposes of both SDLT and ATED). The central question was whether the acquisition of the option could be said to be exclusively for the purposes of the development and resale of the property in the course of a property development trade and so eligible for relief.

While HMRC had accepted that the acquisition of the option served the purposes of that trade, other purposes were also served by IST entering into the option agreement – namely, as the Tribunal found, addressing the pressing need of IST’s director for funds, preventing the sale of the property to a third party, and providing IST with time to raise the funds to acquire and develop the property.

Importance of exclusive purpose

The Tribunal accepted that these additional purposes could readily fall within the ambit of a property development trade. However, noting the unusually high premium for the option and distinguishing (in line with previous case law on the point) between a “main” purpose and an “exclusive” purpose, the Tribunal, taking the purposes of the option agreement for IST as a whole, held that the development and resale by IST of the property was not the exclusive purpose of the option agreement for IST. Therefore, the 15% SDLT rate applied to the acquisition of the option, with ATED applying during the period between the grant and the exercise of the option. That said, the Tribunal agreed that, as the owner of the freehold of the property, the director occupied it as of right – not by virtue of permission granted by the option holder – and so was not a “non-qualifying” individual for the purposes of the relief.

It seems reasonable to question why, instead of entering into the option agreement, the parties did not instead simply enter into an agreement for the sale and purchase of the property, with half of the purchase price paid upfront, albeit in instalments, by making a deposit available immediately for the use of IST’s director. That way, there would have been no SDLT charge before completion of the acquisition of the freehold or ATED charge (as substantial performance of the contract would not have occurred before completion so that no chargeable interest in land would have been acquired for SDLT or ATED purposes until then). Property developer’s relief (which on and following acquisition would have been available (as it was on and following the actual July 2019 acquisition)) would also have afforded full relief from both ATED and the 15% SDLT charge).

The take-home message from the case is the importance of being aware that, where acting for a company acquiring a residential property, a 15% (or 17%) flat rate of SDLT will apply if relief is not available. Assuming reliance on the relief is to be sought, it is essential to consider the terms of the relief in order to be able to get comfortable that the relief will be available. This is especially important given the relief is construed narrowly.

If you have questions about the issues raised in this case, please contact Michael Fluss.