In Investment and Securities Trust Ltd v HMRC [2025] UKUT 331 (TCC), the taxpayer appealed against a ruling of the First-tier Tribunal (FTT) that the Stamp Duty Land Tax (SDLT) enveloping charge and the annual tax on enveloped dwellings (ATED) applied to a purchase of a residential property (the Property).
The amount of SDLT in question was £372,000 and the ATED liability was £46,539.
Relief was available from the SDLT enveloping charge and the ATED liability if the Property had been acquired exclusively for a property development trade.
The taxpayer company acquired an option (the Option) to purchase the Property for a purchase price of £9.3m (the Option Agreement). The taxpayer was a property development company and it intended to develop and sell the Property. The Option was granted to the taxpayer by one of its directors (V) and the consideration for the grant of the Option was £4.65m (the Option Sum) which was to be treated as part of the purchase price if the Option was exercised. The taxpayer was ultimately controlled by V and her children. Following a downturn in the property market, developing the Property for resale became unviable and instead, the taxpayer exercised the Option and later, without undertaking any development, it sold the Property for approximately £6.9m.
The FTT found that there were three purposes to the grant of the Option which were: (1) V’s pressing need for funds; (2) preventing the sale of the Property to a third party; and (3) providing the taxpayer with time to raise funds to acquire and develop the Property.
Counsel for the taxpayer said that the FTT wrongly focussed on the purpose of the taxpayer in paying the Option Sum when it ought to have focussed on the purpose for which the Option was acquired. The Upper Tribunal (UT) disagreed with counsel and held that the statutory question was - what is the purpose for which the interest was acquired and not, what is the intended use of the underlying land. The UT concluded that the unusual nature of the Option Agreement and the high Option Sum were significant factors in demonstrating that development of the Property was not the exclusive purpose for acquiring the Option. The UT confirmed that the FTT had been entitled to conclude that addressing V’s need for financial assistance was a purpose outside the ambit of the taxpayer's property development trade and therefore, relief from the SDLT enveloping charge was not available.
For ATED, the purpose for which the interest was held had to be separately assessed on each day that it was held. The UT said that the FTT erred in law by concluding that the purpose of holding the interest was linked to the purpose on acquisition. Once the Option had been granted and V's need for funds had been addressed, this could not be a purpose for holding the Option and instead, at this point, the purpose for holding the Option was exclusively for a property development trade. Relief from ATED was therefore granted and the decision of the FTT on this point was set aside.
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