UK: Charities Can Claim Relief From SDLT On A Joint Purchase

Summary and implications

Stamp duty land tax (SDLT) is not payable if the buyer is a charity, who is able to satisfy certain conditions and claim relief. In the joint appeals of (1) The Pollen Estate Trustee Company Limited and (2) Kings College London v HMRC¹ the Court of Appeal has clarified that if on a joint purchase one of the buyers is a charity but the other is not, relief is available to the charity on the acquisition of their interest.

Accordingly:

• a land transaction is exempt from SDLT to the extent that the buyer is a charity;
• the interpretation adopted of clear legislative language, and particularly the insertion of words to aid interpretation, seems very bold on the part of the Court of Appeal; and
• It is currently unclear whether HMRC will appeal.

Background

The two appeals both concern joint purchases of land where one of the buyers is a charity but the other is not.

Pollen Estates (the Trustee) concerns a trust that was set up in 1812 and has over 100 beneficiaries. The two major beneficiaries are charities: the Church Commissioners and the Secretary of State for Defence, as trustee for the Greenwich Hospital. The assets of the trust comprise commercial property in London.

Kings College London (KCL), a charity, operates a shared equity scheme under which it contributes to the price of homes bought by its employees in return for a proportionate equitable interest. KCL contributed to the purchase price of a flat and the employee executed a declaration of trust by which he held the flat as to 46.3 per cent for KCL and 53.7 per cent for himself.

In both cases, the buyers claimed charities relief from SDLT so only the non-charity buyers paid SDLT on their interest in the land. HMRC refused to grant relief in both cases and so the Trustee and KCL appealed. Their challenges were heard initially by the First-tier Tribunal and then by the Upper Tribunal, which decided that the charities were not entitled to any relief, because the purchaser in both transactions included a non-charity as well as a charity.

The parties appealed on the basis that the Upper Tribunal had:

a) identified the wrong interest in land; and

b) adopted an unduly literal interpretation of the exemption.

SDLT

SDLT is a tax on a land transaction, which is defined as "any acquisition of a chargeable interest". A chargeable interest comprises any estate, interest, rights or power in or over land in the UK. Some land transactions are exempt from charge. Schedule 8 of the Finance Act 2003 provides for charities relief. A land transaction is exempt from charge if the buyer is a charity and the following conditions are met:

a) it intends to hold the land for qualifying charitable purchases; and

b) the transaction must not have been entered into for the purpose of avoiding tax, whether by the buyer or any other person.

Section 103 applies to a land transaction where there are two or more buyers who will be jointly entitled to the interest bought. It provides that any obligation, requirement or liability of the buyer falls on both buyers.

The correct interest in land

All parties agreed that the case was concerned only with the beneficial interests in the properties, not the legal estates. The question was whether the interest to be identified for SDLT purposes was the entire equitable estate bought collectively by the beneficiaries under a bare trust, as argued by HMRC, or undivided shares individually bought by each of those beneficiaries, as argued by the Trustee and KCL.

The Court of Appeal confirmed that the focus is on what the trustees have bought because it is that interest which is deemed, for the purposes of SDLT, to be vested in the beneficiaries. There is only one equitable interest in the land, the shares of which are undivided, and the beneficiaries are deemed to buy this collectively. There is one single land transaction so SDLT is payable on the equitable estate as a whole. Therefore, the Court of Appeal agreed that the Upper Tribunal had correctly identified the interest in land.

Interpretation of the relief

The Upper Tribunal thought that to read Schedule 8 as applying where the buyer includes a charity was too wide an interpretation and the Court of Appeal agreed that such a liberal interpretation would make the whole land transaction exempt from SDLT. That could not have been Parliament's intention. However, the Court of Appeal disagreed with the Upper Tribunal's literal interpretation and its over emphasis on section 103 FA 2003. In the Court of Appeal's view section 103 deals with special cases and should not have swayed the Upper Tribunal.

Instead the Court of Appeal favoured reading Schedule 8 as "a land transaction is exempt from charge [to the extent that] the buyer is a charity and the following conditions are met". As a result of inserting the words "to the extent that" into the relief, a land transaction can be partially exempt, to the extent of a charity's interest. The court considered that this approach is not only consistent with a previous case, Inco Europe, but is justified by a sufficient policy imperative – it would be capricious not to afford the relief to a charity in these circumstances.

Impact

First-year law students are always taught that hard cases make bad law and arguably the Court of Appeal has allowed itself to be swayed by the undoubted merits of the two appellants. To insert "to the extent that" seems a pretty large step in construing clear, but unpalatable, legislation. It is interesting to speculate whether their Lordships would have been so generous in their interpretation had either KCL or the Trustee been involved in tax planning.

It remains to be seen whether HMRC will now appeal. The concern that the judgment could be used to avoid paying SDLT was specifically dismissed by the Court of Appeal due to the avoidance condition present in the relief. Despite this HMRC may worry that the generous interpretation adopted by the Court of Appeal could be extended to possibly other areas such as SDLT group relief.

Footnote

1. To read (1) The Pollen Estate Trustee Company Limited and (2) Kings College London v HMRC in full click here

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