SDLT and ATED reliefs for property developers considered…
Introduction
Relief from Stamp Duty Land Tax (SDLT) and the Annual Tax on Enveloped Dwellings (ATED) is available to property developers when property is acquired or held exclusively for the purposes of development. In Investment and Securities Trust Limited v The Commissioners for HMRC [2025] UKUT 331 (TCC) (IST v HMRC) the Upper Tribunal considered that exclusive purpose relief where an option to purchase a property was acquired from a family member, not only to develop the property, but also to provide a pool of funds to that family member. The Upper Tribunal also considered the question of whether or not SDLT and ATED reliefs were affected by continued the occupation of the property by the family member, as a non-qualifying person.
SDLT, Part 4 of the Finance Act 2003 (FA 2003)
SDLT is commonly thought of as arising when a residential property (or dwelling to use the statutory language) is purchased. Whilst this is a convenient description of SDLT in its most common form, it arises in a wide range of land transactions ( s. 43(1) FA 2003) when a chargeable interest (s.48 FA 2003) is acquired. The concept of a chargeable interest is widely drawn as an
“..estate, interest, right or power in or over land…” or the benefit of an “…obligation, restriction or condition…” in respect of the same.
Paragraph 3, Schedule 4A of FA 2003 provides for a higher flat rate of 17% for high-value residential transactions (the threshold is currently £500k), where the purchaser is a company.
ATED, Part 3 of the Finance Act 2013 (FA 2013)
A common method of avoiding SDLT was to own a property, particularly a high value one, through a company. By selling the shares in the company, rather than the property itself, SDLT could be avoided. ATED’s introduction followed numerous press articles with lurid headlines such as “Secret film shows how buyers of luxury London homes can avoid millions in tax”. ATED, was introduced in Part 3 of the FA 2013 as a bulwark against this tax avoidance strategy, by making it less attractive for companies, usually in the form of special purpose vehicles, to own residential property. It is worth bearing in mind that at the time ATED was introduced the then Conservative government was facing calls for wealth taxes, mansion taxes and maintenance of 50p higher rate of income tax. ATED was a response to those calls, not only to curb SDLT avoidance but also as a means of clawing back tax losses.
ATED is an annual tax that is charged to property owning companies. ATED has a narrower focus than SDLT and is calculated, on days during the relevant chargeable period (1 April to 31 March each year), when a company has a chargeable interest in a single-dwelling with a taxable value of £500,000 or (s.94 FA 2013). As of writing, the annual ATED charge for interests valued at between £500k to £1 million is £4,450; £72,000 for valuations of £5 to £10 million; and £292,350 for interests valued at £20 million plus.
Reliefs
SDLT and ATED relief is available to, amongst others, property developers. Under paragraph 5, Part 3 of the FA 2003, the 17% higher rate of SDLT will not apply where the chargeable interest is (emphasis added):
“ …acquired exclusively for one or more of the following purposes:
(a) exploitation as a source of rents…;
(b) development or redevelopment and resale in the course of a property development trade;
(c) resale in the course of a property development trade…;
(d) resale (as stock…) in…a property trading business…”
Similarly, section 138 of the FA 2013 provides for relief from ATED (emphasis added):
“…(1)A day in a chargeable period is relievable in relation to a single-dwelling interest if on that day
(a)a person carrying on a property development trade (“the property developer”) is entitled to the interest, and
(b)the interest is held exclusively for the purpose of developing and reselling the land in the course of the trade…”
Bars to relief: occupation by a non-qualifying individual
SDLT and ATED reliefs are not available where a “…non-qualifying individual is permitted to occupy…” the property (paragraph 5(2) FA 2003 and s.135 FA 2013). This restriction covers a variety of individuals that have interests or connections to the person who holds the chargeable interest. A typical example being a property occupied by a director of the company developing it.
IST v HMRC
The facts
V was at, all material times, a director of IST a property development and investment company. IST was a subsidiary of a company of which V was the majority shareholder. V had been drawing between £1m and £3m from IST and had an overdrawn director’s loan account of about £640k. V was in pressing need of funds. In March 2013, V’s son (S) was appointed as a director of IST and began to run the company. At about this time IST had a cash balance of around £45k. S believed that IST needed to cut costs and increase revenues, in particular so it could sustain V's drawings.
V owned the freehold of a substantial residential property, in Saint John’s Wood, London (the Property) and given her financial situation was considering selling the Property, which, at that time was in a state of some disrepair. S believed that the Property had development potential. S was given guide prices for the Property ranging from £9.3 million in its - then - current state to £15 million if completely refurbished and extended.
Given its financial state IST could not purchase the Property outright. Furthermore, it was envisaged that redevelopment of the Property would be expensive and that it would take some time for planning permission and other development consents to be obtained. However, if V was not put in funds she would have been forced to sell the Property on the open market. So, IST’s solution was to make payment by instalments. In 2014 IST entered into an option agreement (the Option Agreement and the Option) to acquire the Property. The terms of the Option Agreement were an Option price of £4,650,000, to be exercised within 5 years and 3 months of grant and a purchase price of £9,300,000 (Option price included).
V drew a total of about £1.2 million of the Option down, over 12 months. Delays in obtaining permissions and a declining property market delayed IST’s exercise of the Option until late 2019. IST subsequently sold the Property in early 2020.
HMRC assessed that IST was liable to pay higher rate SDLT of £372,000 on the acquisition of the Option and issued closure notices in respect of ATED for the years 2015, 2018 and 2020 totalling £46,539 . IST appealed the assessment and closure notices.
The First Tier tribunal (FTT)
Two questions, common to both SDLT and ATED were to be determined by the FTT:
Was the Option acquired exclusively for the purposes of the property development trade, thereby engaging the reliefs in paragraph 5 (SDLT) and s.138 (ATED)?
As a non-qualifying individual was V permitted to occupy the Property, thereby negating the reliefs available as a consequence of s.5(2) and s.135 ?
It was not in dispute between the parties that:
between March 2014 and January 2020 IST carried on a property development trade;
the Option was an equitable interest in land and therefore a chargeable interest;
this was a high value residential transaction, thereby engaging the higher rate of 17% SDLT; and
V was a non-qualifying individual in occupation of the Property.
As a matter of fact the FTT found that:
V had pressing need for funds;
there was no real evidence of any negotiations between the parties as to the terms of the Option Agreement;
the Option price was untypically high; and
the Option Agreement was structured in such a way that it allowed V immediate and unrestricted access to funds.
HMRC’s position:
HMRC submitted that the Option was not acquired exclusively for the purpose of development or redevelopment and whilst IST may have acquired the Option with this is mind, there were other purposes:
to assist V and her pressing need for funds;
to prevent the sale of the Property to a third party;
to give IST time to raise funds to purchase the freehold of the Property; and
to allow V somewhere to live whilst she looked for another home.
On the question of relief being barred by V’s occupation of the Property. HMRC submitted that as V had both the right and the intention to occupy the Property at the time the Option was granted she was thereby permitted to occupy the Property, for the purposes of s.5(2) and s.135.
IST’s position
IST submitted that though Option Agreement prevented V from selling the Property to a third party, provided IST with additional time to raise funds and assisted V with her financial position, those purposes were secondary to the principal purpose, namely developing the Property. The tribunal’s focus should be on the purpose of the acquisition and not in this case those steps taken in furtherance of and incidental to that purpose, which of themselves did not amount to separate purposes.
As to V’s occupation of the Property as a non-qualifying individual. IST submitted that as V occupied the Property as of right as its freeholder. Hence, this was matter that was beyond IST’s control and therefore something it could not permit for the purposes of s.5(2) and s.135.
The FTT’s decision
The FTT’s found that IST was liable for SDLT and ATED and confirmed the assessments and closure notices.
The FTT found that the way the Option agreement was structured was, given that V was connected to IST, intrinsically linked to providing V with funds and that the additional purposes of entering into the Option Agreement (to prevent a sale to a third party and to provide time for IST to raise funds) whilst not objectionable per se, were in the context of IST’s relationship with V, evidence of an additional purpose, beyond that of developing the Property, or as the FTT put it:
“ …we have concluded that IST did not acquire or hold the interest in the Property for the exclusive purpose of its property development trade but also for the purposes of addressing [V’s] pressing need 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....We accept that the additional purposes would readily fall within the ambit of a property development trade but…when the purposes are considered as a whole, pursuance of a property development trade was not the exclusive purpose…” [99]
On the question of V’s occupation of the property as a non-qualifying individual the FTT concluded that V’s occupation of the Property as of right did not engage either paragraph 5(2) FA 2003 and s.135 FA 2013, as there was no question of IST being in a position to permit V’s occupation or otherwise:
“…The permission element must indicate that it is being given by a party who is in a position to meaningfully giver it through their real control of who may use the property [114]…We find that the Option did not grant IST any possession over the Property and did not give it the ability to influence or decide whether or not [V] occupied the Property…[who] occupied the Property as of right as freeholder.[118]…”
Interestingly this reasoning was also applied in dismissing the claim that V’s continued occupation of the Property was an additional purpose for the granting of the Option.
The appeal
Effectively the Upper Tribunal considered a single ground of appeal, that brought by IST and applicable to both SDLT and ATED, namely that the FTT had erred in determining the purpose for which the Option was acquired or held. IST contended that the question asked by the FTT should have been: for what purpose was the land interest acquired (for the purposes of SDLT) and held ( for the purposes of ATED) and not what were the purposes of the payment for the chargeable interest. In other words, the FTT had erred by identifying the purposes of the Option Agreement rather than the purpose for which the Option was acquired.
IST position was that the issue to be considered was whether the exclusive purpose in acquiring the Option was to develop the Property or was there anther purpose which involved a different use for the Property. Overpayment for the Option was irrelevant if the company intended to put the property to use in the the property development trade.
HRMC’s position was that the question to be answered was, for what purpose was the chargeable interest acquired; in this case, the Option and not what to what use was the Property to be put.
Decision on SDLT
IST’s argument on SDLT relief was rejected:
the Option had not been acquired on normal commercial terms and had it been it would not have been subject to higher rate SDLT [68];
s.5(1) is not limited to a consideration of the intended use of the land, it is expressly concerned with the purpose for which the chargeable interest, in this case the Option, was acquired [74];
this was a case where there was a connected party, as such, it was a question of fact whether putting funds in the hands of V was a purpose of the acquisition of the chargeable interest [76]; and
the contractual terms of the Option Agreement were relevant background facts and context to enable the tribunal determine the purpose of the Option as a chargeable interest [79].
Decision on ATED
IST appeal on ATED relief was allowed. With the Upper Tribunal making the following decisions:
IST’s argument that in order to assess, the proposition that only the intended use of the Property should have been considered, was rejected, again.
HMRCs argument that the reference to “land” in s.138(1) must mean the interest over the land, was also rejected on the basis that an interest in land cannot be redeveloped only the underlying land.
The tribunal rejected HMRC’s argument that the holding of an interest in land was a consequence of and inextricably linked to the purpose for its acquisition.
The FTT erred in law by not considering the question of whether, post-acquisition the Option was held exclusively for developing the land as part of IST’s property development trade.
The question posed and answered by the Upper Tribunal was the identification of the purpose for which IST held chargeable interest on a particular day [97].The original purpose of the acquisition being only of evidential value. The Upper Tribunal found that after the acquisition V’s need for funds had been addressed and thereafter IST continued to hold the Option for the purposes of developing the Property. This reasoning echoed IST’s submission that the purpose of making funds available to V had been “spent” once the Option had been granted [93]. The other two purposes, namely the preventing the sale to a third party and giving IST time to raise funds, were at this point, without more, considered to fall within the ambit of the property development trade [103].
Conclusions
SDLT and ATED reliefs were designed to work in tandem. ATED was aimed at discouraging tax avoidance by way of the use of SPVs. ATED was not however intended to discourage commercial property development. Similarly the higher rates of SDLT are not - by design - intended to discourage property development.
In this case we see a situation that arises in what might be thought of as, quasi-commercial situations. Where. for example a HNWI wants to commercialise a family interest in a property, for reasons that may not have an entirely commercial rationale. To do so carries considerable risk that tax relief will not be available. It should be borne in mind that IST was already involved in the property development trade when it entered into the Option Agreement and its ultimate aim was to develop the property and make a profit. It was the ulterior purpose that acted as the bar to relief.
To my mind the key factors in IST v HMRC were the combination of apparently noncommercial or atypical terms and a connected relationship between V and IST. This was a matter considered by the Upper Tribunal when it explored the scenario put to it by Senior Counsel for IST, of a commercial developer overpaying for an option, in order put the vendor in funds, so as to secure a property. On this point it was clear:
“…Putting funds in the hands of a vendor is an inevitable and incidental consequence of an acquisition. It would not be seen as a purpose of the acquisition where the vendor is unconnected. Where there is a connected vendor, it will be a question of fact whether putting additional funds in the hands of the vendor was a purpose of the acquisition. In the context of options, if the reason for the creation of an option and the terms of the option are simply part and parcel of a commercial redevelopment then the exclusive purpose test could be satisfied. Parliament intended to provide relief only to property development trades carried on on a commercial basis…” [76]
As for ATED one important aspect of the relief available is its temporal nature and the recognition that the purpose for holding a property may change over time and on any particular day. It is therefore important for all developers to keep an eye on the actual purpose for which a property is held, particularly as market conditions vary and development plans change over time.
This post is not intended to and should not be taken as legal advice.
(c) by Liam Hemmings
This work is licensed under a Creative Commons Attribution-Non Commercial 4.0 International License.