Although HMRC have won in the First-Tier Tribunal in the Vardy Properties case there is nevertheless some encouragement for other versions of sub-sale schemes.

HMRC have won at the First-Tier Tribunal in a case involving a claim for sub-sale “relief” using an unlimited company purchaser which made a distribution of a property by way of a final dividend to its parent.  This case is likely to be appealed by both sides but there are some interesting features of this case which merit further comment (see below).

Basic Structure

Vardy Properties (Teesside) Limited (“C”) wished to acquire a property for £7.25m from V.V. Stockton LP (“A”) without paying SDLT.  Accordingly its advisers devised a scheme with the following steps:

  • C incorporated a wholly-owned unlimited company subsidiary, Vardy Properties (“B”) with an initial share capital of £2;
  • C then subscribed for £7.4m worth of new ordinary shares in B;
  • B contracted with A to buy the property for £7.25m and paid a 10% deposit;
  • B then resolved at an extra-ordinary general meeting to reduce its share capital from £7,400,002 to £1,000.
  • Shortly afterwards the shareholders of B approved a distribution in specie of the property as a final dividend to C, subject to completion of its purchase from A.
  • Several days later B completed the purchase of the property from A and distributed it by way of final dividend to C.

B and C’s arguments

Both B and C said that this was a sub-sale arrangement combined with a transfer to C for nil consideration so that no SDLT was chargeable on the acquisition by both B and C.  In particular, the acquisition by B fell to be ignored under section 45(3), FA 2003 because completion of that contract occurred at the same time as the transfer to C and C’s acquisition was for no consideration being a dividend.

HMRC’s Case

HMRC said that:

C never became entitled to call for a conveyance because B had not prepared the initial accounts required by sections 263-270 of the Companies Act 1985 and so C only ever held the property as constructive trustee for B, so section 45, FA 2003 was not satisfied (“the unlawful distribution”); and
even if section 45, FA 2003 applied so that there had been a sub-sale, C had “indirectly” paid £7.25m consideration because this was a pre-ordained scheme in which C provided the purchase monies to B which B used to pay A and so C was taxable on the £7.25m and not on nil.

The tribunal decided the case by agreeing with both of HMRC’s arguments.  As a result B was liable for SDLT on £7.25m on its acquisition from A because, due to the unlawful distribution, the sub-sale rules in section 45, FA 2003 had never been engaged.  The tribunal went on to say however that in the absence of the unlawful distribution, section 45, FA 2003 would have been engaged so that B’s completion of its acquisition would have been disregarded.  However, in that case the tribunal said that C would have been liable for SDLT because it had “indirectly” paid consideration for its acquisition of the property when subscribing for shares in B.


The taking by HMRC of the unlawful distribution point just before the hearing began in a sense “ambushed” the taxpayer and one wonders whether the appeal would have proceeded if the point has been raised much earlier.  The point is also an interesting one because under section 263, Companies Act 1985 a distribution by way of a reduction in share capital (which some other versions of the sub-sale scheme used) does not require initial accounts.  The taxpayer does not appear to have argued for this even though there was a reduction in share capital by B.  This may have been because the distribution by B was not technically by way of a reduction in share capital because the reduction was immediately followed by a declaration of a final dividend by way of a distribution in specie.

The tribunal’s reasoning that C had “indirectly” paid consideration under section 45, FA 2003 seems flawed if one asks what would happen if C had actually paid B for the property as well as subscribing for shares.  In that case section 45, FA 2003 could still have been engaged.  However, C would have paid SDLT on the indirect provision of the £7.25m by way of share capital plus the consideration C actually paid to B.  The judges tried to rule out such a result by asserting that there should be no double-counting but the logic of their interpretation leads to double-counting.

While the decision is bad news for taxpayers who undertook this version of the unlimited company sub-sale scheme, it does provide some encouragement for those schemes where either accounts were prepared or were not required and B was able to self-fund its acquisition.  It is also encouraging for those who undertook other versions of sub-sale schemes where C only ever gave a low or nominal consideration because the decision endorses the engagement of section 45, FA 2003 without HMRC being able to point to any meaningful consideration having been given by C.  It should be borne in mind however that the case involved a pre-section 75A, FA 2003 scheme and schemes that escape this decision but were done after section 75A came into effect will have to face that provision as well.

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For professional and insurance reasons Patrick is unable to offer any advice until he has been formally instructed.