Defeat in the Court of Appeal ("CoA") for the taxpayer in the case of The Tower One St George Wharf Limited v The Commissioners for His Majesty's Revenue and Customs [2025] has left it with an increase in its Stamp Duty Land Tax (SDLT) liability from £1.2m to £8m. Ouch.
Background
The taxpayer acquired a block of flats through a series of transactions (the "scheme") designed to give it a significant corporation tax benefit in the form of a "step up" from book cost to market value.
The site on which the flats eventually stood was acquired in 1997 by a Berkeley group company called St George (South London) Limited ("SGSL"). In 2000, SGSL sold the beneficial interest in the site to St George plc ("St George"), but retained the legal interest which it held on bare trust for St George. On 5 July 2011, as part of the scheme, all of the following steps were implemented –
- A capital contribution of £1,000 was made to a special purpose vehicle, Berkeley Sixty-Four Limited ("B64"), to ensure that it had positive distributable reserves.
- SGSL granted a 999 year lease of the site (which was nearing the end of development) to B64 (the "Lease") at a premium equal to its book cost of £30,198,814 (which by inference, was the book cost in the hands of St George and not SGSL which was a bare trustee), together with a rent of £1 per year.
- A development management agreement was entered into between the taxpayer, B64, SGSL, and St George, under which St George was appointed to carry out project management and development of the site.
- The taxpayer acquired the entire issued share capital of B64 for £170,000,001.
- B64 transferred the Lease to the taxpayer for £30,248,814 (the "Transfer").
Prior to 5 July 2011, St George, B64 and the taxpayer were each owned by the Berkeley Group plc and SGSL was owned by St George.
SDLT group relief was claimed by B64 in respect of the Lease and by the taxpayer in respect of the Transfer.
HMRC enquired into the corporation tax position of the taxpayer who accepted that the scheme did not achieve its corporation tax aims.
HMRC subsequently reviewed the taxpayer's SDLT position and concluded that the group relief claim by B64 on the grant of the Lease did not need to be considered because SDLT sub-sale relief was available in respect of that transaction. This assessment proved incorrect but HMRC found itself out of time to assess B64 to SDLT. As regards the Transfer, it denied the taxpayer's SDLT group relief claim on the basis that the transaction formed part of arrangements of which the main purpose, or one of the main purposes, was the avoidance of a liability to corporation tax (which would preclude SDLT group relief from applying). It also said that SDLT should be paid on the market value of the Transfer (by virtue of section 53 Finance Act 2003 (FA 2003)) as B64 and the taxpayer were connected and because the exemption from the market value rule in section 54(4)(b) of FA 2003 did not apply.
Section 54(4) provides that the SDLT market value rule does not apply where: (a) the vendor is a company and the transaction is, or is part of, a distribution of the assets of that company (whether or not in connection with its winding up), and (b) it is not the case that the subject-matter of the transaction or an interest from which that interest is derived, has, within the period of three years immediately preceding the effective date of the transaction, been the subject of a transaction in respect of which group relief was claimed by the vendor.
Grounds of appeal
Before the CoA, the taxpayer dropped its claim for SDLT group relief in respect of the Transfer. Instead, it sought to argue that the SDLT charge applicable to the Transfer should be based on the actual consideration paid by it to B64 and not on the market value of the property transferred. Its argument for this was two-fold. Firstly, it said that section 54(4)(b) should apply because B64's claim for SDLT group relief in respect of the Lease was invalid or ineffective (Ground 1) and secondly, it said that the previous Tribunal was wrong to conclude that the reference in section 54(4)(b) to "the period of three years immediately preceding the effective date of the transaction" included the date of the relevant transaction itself (Ground 2). Each ground was considered to be an alternative and so success on either ground would prevent a market value charge.
HMRC argued that if section 54(4)(b) was considered to prevent a market value charge from applying, the anti-avoidance legislation in section 75A FA 2003 would apply to deem a notional land transaction to have taken place effecting the grant of the Lease by SGSL to the taxpayer (the notional transaction). Under section 75A, the SDLT payable by the taxpayer on the notional transaction could have been greater than the market value of the Lease but HMRC restricted their claim to the said market value. The taxpayer said that if section 75A did apply, that SDLT group relief should apply to the notional transaction or that the notional transaction would be a distribution falling within the exemption to the market value rule in section 54(4)(b).
Decision
As regards Ground 1, the CoA held that section 54(4)(b) did apply to the Transfer because B64's invalid claim for group relief on the grant of the Lease to it did not prevent this section from applying. The court said that section 54(4)(b) was designed to prevent the circumvention of a group relief clawback and so only applied if there was a valid and effective group relief claim (which B64's claim was not).
As regards Ground 2, which the CoA did not need to consider given the taxpayer's success on Ground 1, the court determined that there had been a 'simple error in the drafting' of section 54(4)(b) and stated that the three-year period referred to in that section, included the effective date of the relevant transaction. Had the taxpayer not succeeded on Ground 1, it would therefore have lost on Ground 2.
The CoA held that section 75A did apply in respect of the notional transaction and that SDLT was payable by the taxpayer on the market value of the notional transaction (namely £200m). The CoA did not accept the taxpayer's argument that SDLT group relief should apply to the notional transaction as this had no tax avoidance motive or that the notional transaction should be insulated or cleansed of the actual tax avoidance purpose. Instead, it determined that at the time the Lease was acquired by the taxpayer, it had a tax avoidance motive and that could not be ignored when considering the notional transaction. The CoA thought it impossible in many cases to postulate with any clarity what the relevant parties' purposes would have been if they had implemented a notional transaction and this of itself was an indicator that an inherently uncertain exercise of that nature was not only unnecessary but was also not required to be attempted.
The CoA rejected the taxpayer's argument that section 75A could not justify a market value charge because section 54(4)(b) disapplied such a charge. The court refused to accept that there could be "sideways" distribution from SGSL and said that the notional grant of the Lease could not possibly be described as a distribution of SGSL's assets since the property was not an asset that was on any basis available for it to distribute as a bare trustee.
There is a lot of SDLT at stake in this case and it remains to be seen whether the taxpayer will appeal this decision.
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