Scope of SDLT charity relief too narrow

The case of Pollen Estate Trustee Co Ltd (1) King’s College London (2) v HMRC [2012] UKUT 277 raised a straightforward issue which seemingly has been complicated to decide. In its simplest terms, the question is whether stamp duty land tax relief is available on the purchase of real property by an eligible body – in this case a charity or a Minister of the Crown – jointly with a non-eligible body as tenants in common.

The Upper Tribunal (Warren Christopher J. and Judge Timothy Herrington) decided that such a purchase was a single property transaction and that relief was denied on the grounds that the purchaser was not wholly an eligible body.

This decision has potentially serious consequences for joint equity schemes which are now commonplace in a number of universities and colleges

Transaction tax

SDLT is a new tax that was introduced by the Finance Act 2003. It is a tax on transactions, unlike stamp duty which was a tax on documents. Under stamp duty, if there was no document (e.g. an oral agreement), there was no stamp duty payable. Because SDLT is a new tax, cases decided under stamp duty legislation will rarely be relevant. The decision in Pollen Estates therefore principally relied on the interpretation of certain relevant provisions of the Finance Act 2003. Those provisions are as follows:

1. SDLT is a tax on land transactions (LTs) – section 42(1)

2. A LT is the acquisition of a chargeable interest (CI) – section 43(1)

3. A CI means an interest in land in the UK – section 48(1)(a)). Subsection (b) can be ignored because it applies where, for example, the benefit of a restrictive covenant is purchased. Plainly a CI includes a ?beneficial interest in land.

4. A CI is created by a person acquiring an interest in land and another person disposing of the same interest –section 43(3).

5. By contrast, a Vendor and a Purchaser mean, in relation to a LT, those who respectively dispose of (Vendor) or acquire (Purchaser) the subject matter of the transaction (SMT) – section 43(4). There is therefore a distinction between a purchaser on the one hand (as the person who acquires the SMT) and a person who acquires a CI. This distinction was not made in the judgment, and leads to serious error.

6. The SMT means the CI acquired (the main subject matter (MSM)) plus all interests acquired with it (e.g. all correlative beneficial interests) – section 43(6). For example, in a simple real property sale and purchase, it is whole of the beneficial interest in the land itself.

7. A LT (i.e. the acquisition of a CI, see paragraph 2 above) is a chargeable transaction (CT) unless exempt. Schedule 8 provides for exemptions, including for charities.

8. The tax on a CT is a percentage of the chargeable consideration (CC) – section 55(1). The percentage varies according to the relevant consideration (RC) and the type of relevant land (RL) – residential or non-residential/mixed. RL is land in which a particular CI is acquired (i.e. the MSM). RC is the chargeable consideration for the transaction (i.e. the price paid for the MSM) – section 55(3).

9. However, if transactions are linked, the RL is any land an interest in which any CI is acquired and the RC is the aggregate of the price paid for all the CIs – section 55(4).

10. Transactions are linked if they form part of a single scheme, arrangement or series of transactions between the same Vendor and Purchaser (within the meaning of section 43(3)) or in either case persons connected with them - section 108(1).

An example was given in the judgment (paragraph 30) of four unconnected joint purchasers (JPs) purchasing a house as tenants in common for £800,000. Applying these principles, the SMT is the house. The four JPs together are the Purchaser of the SMT – i.e. the house H. Each JP acquires a CI which is linked to the three other CIs acquired because they all have the same Vendor and the same Purchaser for the purpose of section 43(4). Accordingly, the tax rate must be computed having regard to section 55(3) by aggregating the RC for each MSM and applying the appropriate percentage to that aggregate. This therefore results, as expected, in a tax rate of 4 per cent on the RC for each CI, and not as suggested in the judgment (paragraph 33(3)), a tax rate of 1 per cent applicable to the RC for each CI.

Charity as joint purchaser

Consider now the position where one of the JPs is a charity. The tax rate will still be 4 per cent on the RC for each LT (i.e. each CI acquired which is not exempt), but under Schedule 8, the CI acquired by a charity is not a LT because it is exempt. There was no assertion in Pollen Estate by HMRC that the conditions in Schedule 8 were not met. So in the example of the acquisition of H, SDLT is charged at 4 per cent only on the CC of each of the non-exempt JPs. This leads to a sensible result whether a charity acquires, say, 99 per cent of the SMT or 1 per cent – which must surely be as Parliament intended.

The judgment includes an extensive discussion of section 103 as an aid to the construction of the main charging provisions as outlined above. This is unnecessary. The section is misleadingly labelled “joint purchasers”. But what section 103 does is to ensure that where there are joint purchasers, they are jointly and severally liable for the payment of SDLT. This is emphasised by section 85 under which the Purchaser (as defined by section 43(4)) is liable to pay SDLT and engages section 103 in the case of joint purchasers.
Thus the charity, even though no tax is payable in respect of its beneficial interest, is jointly liable with the other (non-charity) co-purchasers for the payment of the SDLT. Section 103(3) also provides that where a LT is notifiable, even though there are joint purchasers, only a single Land Transaction Return is required. A notifiable transaction is (generally) one where a major interest in land (fee simple or term of years absolute) is acquired. Multiple Land Transaction Returns are not therefore required when there are JPs.

In my opinion, the decision in Pollen Estates is wrong. Where real property is purchased by an eligible body such as a university or college (i.e. a charity) jointly with a non-eligible body such as an individual, relief from SDLT should be available on the chargeable amount of the interest acquired by the eligible body. The rate of SDLT payable by the individual will be the same rate as would be applicable on the full purchase price (including the price paid by the eligible body).

The issue here is an important one because if charity relief is not available, the cost of implementing joint equity schemes will rise significantly and may render them unattractive. This would be most unfortunate, so perhaps the Court of Appeal will soon be given an opportunity to review the decision.