Investment and Securities Trust Limited v The Commissioners for HMRC

Paragraph 3(1)(a) of Schedule 4A to the FA 2003 provides for SDLT to be charged at 15% of the chargeable consideration in certain circumstances. Paragraph 3(2) of Schedule 4A to the FA 2003 states that 15% rate of SDLT applies where:

The conditions in Paragraph 3(3) of Schedule 4A to the FA 2003 are that:

Paragraph 2 of Schedule 4A to the FA 2003 defines a “high-value residential transaction” for the purpose of Paragraph 3. Paragraph 2(2) states that, “If the main subject-matter of the transaction consists entirely of higher threshold interests, the transaction is a high-value residential transaction …”

The meaning of a “higher threshold interest” can be found in paragraph 1 of Schedule 4A to the FA 2003, which provides as follows:

Paragraph 7 of Schedule 4A to the FA 2003 explains what is meant by the term “dwelling” for the purpose of that Schedule. It states that a “dwelling” is “a building or part of a building” which is “used or suitable for use as a single dwelling”, or “is in the process of being constructed or adapted for such use”, per section Paragraph 7(2). A “dwelling” also includes:

“Land that is, or is at any time intended to be, occupied or enjoyed with a dwelling as a garden or grounds (including any building or structure on such land)”, [paragraph 7(3) of Schedule 4A to the FA 2003, and

“Land that subsists, or is at any time intended to subsist, for the benefit of a dwelling”, [paragraph 7(4) of Schedule 4A to the FA 2003].

Paragraph 5 Sch 4 FA 2003 states:

Section 94(2) of the FA 2013 provides for the ATED to be charged if, on one or more days in a chargeable period:

A “single dwelling interest” is defined by section 108 of the FA 2013. The relevant definition is at section 108(2):

“A chargeable interest that is exclusively in or over land consisting (on any day) of a single dwelling is a single-dwelling interest (on that day)”.

A “dwelling” is “a building or part of a building” which is “used or suitable for use as a single dwelling”, or “is in the process of being constructed or adapted for such use”, per section 112(1) of the FA 2013. A “dwelling” also includes:

“Land that is, or is at any time intended to be, occupied or enjoyed with a dwelling as a garden or grounds (including any building or structure on such land)” [section 112(2) of the FA 2013], and

“Land that subsists, or is at any time intended to subsist, for the benefit of a dwelling” [section 112(3) of the FA 2013].

Relief for property developers is provided by s138 FA 2013:

At the start of the hearing, IST confirmed that it was not disputed that the conditions for making a valid discovery were met nor was it disputed that the discovery assessments (as revised) were made in the correct amount.

It was also common ground that Ms Voice is a non-qualifying individual per paragraph 5A Sch 4A FA 2023, the Option Agreement was a transaction whose subject matter was a higher threshold interest (paragraph 1 Sch 4A FA 2003) such that the transaction was a high-value residential transaction (paragraph 2 Sch 4A FA 2003) and therefore the higher rate of SDLT provided for at paragraph 3 Sch 4A FA 2003 potentially applies.

It was accepted by HMRC in their Statement of Case at [154] that:

“the Appellant carried on a property development trade between 27 March 2014 and 3 January 2020.”

It was further accepted by HMRC in their Statement of Case at [165]-[167]:

In respect of ATED, the only relief relevant to this appeal is the Property Developers Relief, s138 to s140 FA 2013. It is accepted that IST carried on a property development trade between 27 March 2014 and 3 January 2020, such that the condition in section 138(1)(a) is met. Ms Henshaw submitted that the word “exclusively” in s138(1)(b) FA 2013 has the same meaning as that in paragraph 5(1) of Schedule 4A FA 2003. Mr Sykes agreed with Ms Henshaw’s submission that the same questions determine relief from ATED as well as whether or not the higher rate of SDLT applies.

We agree with the parties, the issues to be determined are as follows:

HMRC’s submissions are summarised as follows.

IST’s interest in the Property was not acquired exclusively for the purpose of development or redevelopment and resale in the course of a property development trade per the requirements of par 5(1) Sch 4A FA 2003. It is the purpose at the time the interest was acquired which determines whether Paragraph 5(1) of Schedule 4A to the FA 2003 applies.

The meaning of the phrase “wholly and exclusively for the purposes of the trade” has been considered by the courts in the context of legislation such as section 34 of the Income Tax (Trading and Other Income) Act 2005 and section 54 of the Corporation Tax Act 2009. These provisions state that, in calculating the profits of a trade for tax purposes, no deduction is allowed for expenses that were not incurred wholly and exclusively for the purposes of the trade.

In Vodafone v Shaw [1997] STC 734 (“Vodafone”), the Court of Appeal considered how the exclusivity test had been applied in modern cases on the issue, and at [742] said that the following propositions may be derived from the leading modern cases on the application of the exclusively test:

“(1)

The words for the purposes of the trade mean to serve the purposes of the trade. They do not mean for the purposes of the taxpayer but for the purposes of the trade, which is a different concept. A fortiori they do not mean for the benefit of the taxpayer.

(2)

To ascertain whether the payment was made for the purposes of the taxpayer's trade it is necessary to discover his object in making the payment. Save in obvious cases which speak for themselves, this involves an inquiry into the taxpayer's subjective intentions at the time of the payment.

(3)

The object of the taxpayer in making the payment must be distinguished from the effect of the payment. A payment may be made exclusively for the purposes of the trade even though it also secures a private benefit. This will be the case if the securing of the private benefit was not the object of the payment but merely a consequential and incidental effect of the payment.

(4)

Although the taxpayer's subjective intentions are determinative, these are not limited to the conscious motives which were in his mind at the time of the payment. Some consequences are so inevitably and inextricably involved in the payment that unless merely incidental they must be taken to be a purpose for which the payment was made.”

The meaning of the word “exclusively” in the context of paragraph 5(1) of Schedule 4A FA 2003 was considered in Consultus Care and Nursing Limited v HMRC [2020] UKFTT 179 (“Consultus”). At [24], the Tribunal said:

“It is notable that paragraph 5(1) requires that a property is acquired “exclusively” for one of the specified purposes. It is not a main purpose test (which could be satisfied where there was more than one purpose and one of those could be said to be the main purpose). The express language requires that the only purpose of CCN is one of those specified (in this case for exploitation as a source of rents as a qualifying property rental business)”.

The word “exclusively” in context paragraph 5(1) of Schedule 4A to the FA 2003 should be interpreted as imposing a requirement that restricts the availability of the exemption to circumstances where the only purpose for acquiring the interest is the purpose that is specified in the legislation. The Option was not acquired exclusively for the purpose of development or redevelopment and resale in the course of a property development trade as, whilst IST may have acquired the Option with one of these purposes in mind, the facts demonstrate that there were also other purposes. Those purposes were: to provide IST time to raise the funds needed to purchase the freehold of the Property; to assist with Ms Voice’s pressing need for funds, prevent the sale of the Property to a third party and to provide Ms Voice with somewhere to live whilst she looked for another home.

IST required more time to purchase the Property freehold and whilst this is likely in the course of its trade it does not come within the narrower requirement of being “acquired exclusively” for developing and reselling the land set out in paragraph 5(1) of Schedule 4A FA 2003 nor was it “merely incidental” but was “so inevitably and inextricably” linked to the decision to acquire the Option that it must be taken to be have been a purpose.

Ms Voice, through her ownership of more than half of the issued share capital of Woolcastle was able to exercise direct or indirect control over IST including the decision to enter into the Option Agreement. The failure by IST to obtain a formal valuation of the Property before entering into the Option Agreement demonstrates a lack of commerciality and demonstrates that the provision of funds to Ms Voice was a key purpose. Similarly, preventing the sale of the Property to a third-party and the additional time afforded to Ms Voice to find somewhere to live were not “merely incidental” but were “so inevitably and inextricably” linked to the decision to enter into the Option Agreement that they must be taken as purposes for entering into the Option Agreement.

In the event that the Tribunal finds that the Option was acquired exclusively for the purpose of development or redevelopment and resale in the course of a property development trade, it is submitted that it was intended that a non-qualifying individual would be permitted to occupy the Property, such that the exemption in paragraph 5(1) of Schedule 4A to the FA 2003 does not apply. It was not in dispute that Ms Voice was a non-qualifying individual. It is HMRC’s position that there is nothing within paragraph 5(2) of Schedule 4A FA 2003 which stipulates that it is the purchaser that must intend that a non-qualifying individual will be permitted to occupy the property. There is nothing within paragraph 5(2) which stipulates that the purchaser must grant the non-qualifying individual permission to occupy the property. Paragraph 5(2) simply requires that there is some party who has the power to permit or revoke occupation, and that person permits the non-qualifying individual to occupy and the words “it is intended that” in paragraph 5(2) is sufficiently broad to cover the intention of the purchaser, where somebody else has control over the occupancy of the Property and the intention of any one of the parties to the land transaction, or a common intention of the parties involved.

As Ms Voice had both the right and intention to occupy the Property at the time the Option was granted, the test in paragraph 5(2) is met.

HMRC submit that the word “exclusively” in context of section 138(1)(b) of the FA 2013 should be interpreted as imposing a requirement that restricts the availability of Property Developers Relief to circumstances where the only purpose for holding the interest is the purpose that is specified in the legislation. Whilst one of the purposes for which IST held the Option may have been the development and resale of the Property in the course of its property development trade, the facts of the case demonstrate that there were also other purposes such that the interest was not held exclusively for the purpose of developing and reselling the land in the course of its property development trade.

Mr Sykes’ submissions on behalf of IST are summarised as follows.

The words chosen by Parliament in paragraph 5(2) do not permit HMRC’s interpretation of permitted and the statutory context does not require a departure from the meaning of the words.

In Tophams Ltd v Sefton (Earl) [1967] 1 A.C. 50 at [68], Lord Guest said:

“Apart altogether from authority I would think that outside the sphere of purely polite social language, the word “permit”, used even between laymen bent on serious business or other affairs intended to have legal consequences, would be used as a word connoting on the part of the one whose permission is asked the right effectively to refuse and on the part of the applicant the necessity to ask for and obtain permission, so as lawfully to undertake his proposed course of action. This, in my view, is its legal meaning.”

This borne out by the cited cases and is the short answer to HMRC’s case on “permitted”. See Broad v Parish (1941) 64 CLR 588, an Australian case, Rich ACJ at [594]; Reg. v. Staines Local Board (1888) 60 L. T. 261, Field J. at [264]; Berton and Others v Alliance Economic Investment Company [1922] 1 K.B. 742 Bayley J at [755] and Atkin J at [759] and Toleman v Portbury L.R. 5 QB 288 Cleasby B. at [296]. Further support is found in the Tribunal decisions in Forest Commercial Services Ltd v HMRC [2020] UKFTT 0470 (TC) at [89]-[91] and Waterside Escapes Ltd v HMRC [2020] UKFTT 0404 (TC) at [33]-[53].

Had Parliament intended to subject purchasers to higher-rate SDLT and ATED simply if “a non-qualifying individual will be occupying a dwelling on the land”, paragraph 5(2) would have said so. The permission element must indicate that it is being given by a party who is in position to meaningfully give it through their real control of who may use the property. IST purchased the Option which did not grant it any possession over the Property and did not give it the ability to influence whether or not Ms Voice occupied the property. It is and has always been IST’s position that Ms Voice occupied the Property as of right as the freeholder. IST did not permit this as IST had no control over this.

Whilst it is unnecessary for the Tribunal to determine “who permits”, the strong implication is that this is the purchaser. This inference is explicitly made by the Tribunal in Hopscotch Limited v HMRC [2019] UKFTT 288 (TC) where the “non-qualifying individual” condition was stated at [25] as being that:

“the taxpayer must show that it did not permit a “non-qualifying individual” to occupy the property”

The natural reading suggests that the requirements relate to the control that the purchaser had over the property. As Ms Voice’s occupation of the Property was as of right as the freeholder this was beyond IST’s control and so it cannot have permitted the occupation. This is reflected in HMRC's guidance at SDLTM09660: "no non-qualifying individual is permitted, by the purchaser, to occupy the dwelling."

HMRC accept that IST’s pursuit of their property development trade was at least one of the purposes behind the purchase. HMRC’s argument is therefore limited only to whether this was the exclusive purpose.

The facts confirm that IST’s trade was the exclusive purpose behind the purchase of the Property and not the three other purposes claimed by HMRC: (1) to provide IST more time to raise funds for the purchase and development; (2) to prevent Ms Voice from selling the Property to a third party and (3) to provide somewhere for Ms Voice to live while she looked for new home.

The focus in paragraph 5(1) is on the purpose of the acquisition of the land interest rather than any other part of the transaction, if it were concerned with the purposes of the transaction, it would be worded differently. Therefore, what is required is to determine the purpose for which the land interest is acquired and whether that purpose falls within paragraph 5(1)(a)-(d). There is no basis, as HMRC seek to do, to look at alternative ways in which the transaction could be structured whereby the freehold interest is acquired directly; the purpose is determined by looking at the actual transaction undertaken. The attainment of a purpose will, as a matter of logic, necessarily involve steps to get there and those steps will be in furtherance of that purpose. The purported purposes identified by HMRC are therefore clearly preliminary steps and not alternative purposes and so they do not justify a conclusion that the development purpose is not the exclusive purpose. It is well established in case law on exclusive purpose tests that steps towards fulfilling a purpose do not amount to a separate purpose, Mallalieu v Drummond (Inspector of Taxes) [1983] 2 A.C. 861 at [870] and Samarkand Film Partnership No.3 & Ors v Revenue & Customs [2011] UKFTT 610 (TC) at [355].

It is accepted that a benefit of the Option was that it gave IST more time to raise funds for the purchase and development but this was a means of furthering the wider purpose of developing and selling the Property. If providing more time to fund the purchase were an impermissible purpose that common approach by property developers would always have an additional purpose of “giving more time” and not the exclusive purpose of carrying on the property development trade, with wide reaching impact. Preventing Ms Voice from selling the Property to a third party was a means of furthering the wider purpose of developing and selling the Property. The Option did not grant Ms Voice somewhere to live whilst she looked for a new home as she already owned the freehold and the right to reside at the Property was an effect of the transaction.

Before considering the purpose for which the land acquisition was acquired, we deal briefly with HMRC’s submission that IST could have structured the transaction differently such that IST acquired the freehold interest directly. We do not accept that submission.

HMRC accept that IST carried on a property development trade between 27 March 2014 and 3 January 2020 but do not accept that the interest was held exclusively for the purpose of the property and development trade. Accordingly, HMRC accept that the pursuit of IST’s property development trade was at least one of the purposes behind the purchase but contended that there were additional purposes for the purchase such that the pursuit of the property development trade is not an exclusive purpose. It is HMRC’s case that the other purposes were to give IST more time to raise funds for the purchase and development of the Property; to assist with Ms Voice’s pressing need for funds, to prevent the sale of the Property to a third party and to provide Ms Voice with somewhere to live while she looked for a new home.

IST contended that it was clear from the evidence that IST’s property development trade was the exclusive purpose behind the purchase of the Property. In addition, Mr Sykes submitted the focus in paragraph 5(1) is on the purpose of the acquisition of the land interest rather than any other part of the transaction.

HMRC referred us to the Court of Appeal decision in Vodafone at [742] which set out four propositions that may be derived from the leading cases dealing with the application of “wholly and exclusively”. Whilst Ms Henshaw accepted that the test was not the same as in this case, it was her position that it was useful to consider the four propositions in Vodafone. We disagree. We do not consider that the propositions derived from cases considering whether payments in the context of Income and Corporation Tax were “wholly and exclusively” incurred for business purposes assist us in determining this appeal. Similarly, we do not accept Mr Sykes submission that case law on exclusive purpose tests that steps towards fulfilling a purpose do not amount to a separate purpose are of assistance.

In our judgment, the wording in paragraph 5(1) is clear and requires that the property is acquired “exclusively” for one of the specified purposes. “Exclusively” is defined in the OED as: “So as to exclude all except some particular object, subject, etc.; solely”. We therefore agree with and adopt the statement at [24] in the Tribunal decision in Consultus:

“[24] It is notable that paragraph 5(1) requires that a property is acquired “exclusively” for one of the specified purposes. It is not a main purpose test (which could be satisfied where there was more than one purpose and one of those could be said to be the main purpose). The express language requires that the only purpose of CCN is one of those specified (in this case for exploitation as a source of rents as a qualifying property rental business).”

We note that at [25], the Tribunal concluded that on the basis of the evidence the acquisition of the property by CNN was not the only purpose:

“[25] On the basis of the evidence, we have concluded that the directors of CCN had (at least) two purposes in acquiring the Property. These were to obtain a better return on the company's surplus funds than that which was available at the bank, with the rental income expected to be higher, and also to support the provision of training by the business by having cheap accommodation available for carers. The first of these may well have been the main purpose of the directors (and we accept Mr Seldon's evidence that this was the case) but it is not the only purpose. It is not relevant that the rental income received by CCN from the two properties exceeds the turnover for the provision of training courses (thus illustrating that the provision of training is a smaller component of the business). Accordingly, and whilst acknowledging that the test may be perceived as harsh, this does not meet the “exclusively” requirement of paragraph 5(1) and CCN does not qualify for relief from the higher rate charge.”

For the reasons set out at paragraph 96 (acknowledging that Consultus was concerned with paragraph 5(1)), we consider that the wording in s138(1)(b) is equally clear and requires that the interest is held exclusively for the purpose of developing and reselling the land in the course of a trade. The requirement that the exemption is to be narrowly construed and only available if the interest is acquired or held “exclusively” for one of the stated purposes is not surprising. As stated by the authors of Sergeant & Sims on Stamp Taxes, both paragraph 5(1) and s138(1)(b) were part of a package of targeted anti-avoidance measures aimed at high-value residential properties. Section AB1.1 titled “Background to the introduction of ATED” states:

“2012 was a significant year for stamp taxes. It is not uncommon, of course, for taxes (including stamp taxes) to be the subject of targeted anti-avoidance rules, usually announced in the Budget. Indeed, stamp duty land tax (`SDLT') has been particularly susceptible to this over the years, culminating in its own form of general anti-avoidance rule in 2006 (FA 2003 s 75A). This reflects the approach taken by HMRC to combat perceived tax avoidance schemes between 2003 and 2010, using legislation not litigation.

…

The political determination to counter perceived widespread abuse of SDLT, or be seen to do so, fuelled by considerable media comment in the year or so preceding Budget 2012, led to the birth of a new tax, annual tax on enveloped dwellings (`ATED'), which most regard as a form of stamp tax due to its origin and interaction with SDLT, and to substantial changes to two others, SDLT and capital gains tax (`CGT').

…

The package of three measures (SDLT, ATED and ATED-related CGT) was designed to stop a particular type of practice connected with high-value residential property sales that the Government pejoratively refer to as 'enveloping': ie, acquiring a residential property using a company to act as a `special purpose vehicle', then selling the shares in that company rather than the property to avoid SDLT being chargeable.”

On the basis of the evidence and the findings of fact below, 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 Ms Voice’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, for the reasons set out below, have concluded that when the purposes are considered as a whole, pursuance of a property development trade was not the exclusive purpose.

As stated at paragraph 93 above, it was accepted that IST carried on a property development trade between 27 March 2014 and 3 January 2020. We have no hesitation in accepting that IST fully intended to develop the Property on a commercial basis. The Business Plan presented to the IST Board on 20 March 2014 was comprehensive and set out the reasons for entering into the Option Agreement, considered the merits of an immediate sale of the Property versus possible development of the Property, set out various risks factors that had been considered before concluding that “there is sufficient margin in the above figures to absorb any risk factors and remain profitable. If the development is deemed uncommercial, there is the ability to sell the property as it is.” We find that the Business Plan was posited on a commercial basis and atypical of a business plan for a business considering the acquisition of a property for the purpose of its property development trade.

We accept that the quote for the costs of the works was not a formal quotation and the valuation obtained from Knight Frank on 2 April 2014 was also not a formal valuation but do not agree with HMRC’s submission that this meant that the Business Plan was “uncommercial”. A marketing and sale advice report had been obtained from Savills on 10 January 2014 (three months prior to the granting of the Option) which valued the Property at £9m and at £13m with the addition of a basement; the “informal” valuation by Knight Frank valued the Property £9.3m and at £14.5m following modernisation and the addition of a basement. We do not consider the two informal valuations are so far apart such that reliance upon the valuations demonstrated a lack of commerciality. We do not consider that a formal valuation would have provided IST with any greater degree of certainty nor demonstrated “commerciality”; at that point in time IST was considering three possible options and did not have a settled plan for the Property. Similarly, we do not consider that a formal quote for building works at that time would have provided anything different to what was provided by the informal quote: only an estimated range of costs could be provided until such time as a decision was made whether to sell or develop the Property and architect’s plans obtained. IST commissioned architects to provide plans for three possible options and planning permission was applied for and obtained. No insignificant cost was incurred on architect’s plans, planning permission, dealing with British Heritage, etc.

As stated above, we do not accept that development of the Property by IST was the exclusive purpose for entering into the Option Agreement, we find that it also had the following three purposes.

Ms Voice explained in her witness statement that “In the period leading up to the grant of the Option I was in need of cash and was going to sell 1A Cavendish Avenue to ease my financial situation.” and “Had the Option not been granted in return for a payment of £4,650,000, I would have sold 1A Cavendish Avenue on the open market.” Ms Voice accepted in cross-examination that the Option payment was credited to the director’s loan account, interest at the rate of 4% pa was earned on the balance and that she was able to immediately access the funds whilst she continued to live at the Property. She further accepted in cross-examination that there was no real risk that the option would not be exercised, IST always intended to purchase the Property, she agreed the Option was in essence a delayed purchase and, at the time the Option Agreement was entered into, she had the majority shareholding in the parent company (Woolcastle) that controlled IST.

Mr Voice was referred to WW’s letter to HMRC dated 29 August 2017 which stated “At the time, Ms Voice, who does not work, had a pressing need for funds, hence the company needed to purchase the option in order to ensure that the property was not sold to third parties before the company could purchase it itself.” Mr Voice did not agree with the WW’s comments (despite WW being IST’s appointed advisers) stating: “personally, that was not how he viewed it” as Ms Voice “has money, a very comfortable lifestyle” and that he was not concerned with Ms Voice’s stated need for funds (“she is wealthy”, “has money” and “a very comfortable lifestyle”) but rather was motivated and focused on securing the Property for IST to either develop and sell or sell it undeveloped. We find as fact that Ms Voice’s did have a pressing need for funds and, despite Mr Voice’s claimed lack of concern for Ms Voice’s need for funds, one of the purposes of the Option Agreement was to provide her with immediate and unrestricted access to those funds.

That conclusion is supported by WW’s letter dated 10 August 2018 responded to HMRC’s letter dated 18 May 2018 stating:

It can be seen from paragraph two above that £636,955 was drawn immediately to clear the overdrawn shareholders’ loan account, confirming Ms Voice’s pressing need for funds, with a further £552,847.00 drawn during the first 12 month period. In total, £1,189,802.00 was drawn by Ms Voice during the 12 month period immediately following the grant of the Option. We consider that the Option Agreement was unusual in that it provided that the Option Sum was stated to be part of the purchase price rather than a separate payment. When that point was put to Mr Voice, he professed to not know why that was the case and was unable to provide an answer. Mr Voice accepted in cross-examination that Ms Voice “desired some funds” but stated that no discussion was had between Mr Voice and Ms Voice regarding the rate of drawdown from the directors’ loan account and he accepted that Ms Voice could take the whole sum immediately. Accordingly, we find that one of the primary purposes of the Option Agreement was to address Ms Voice’s pressing need for funds.

Mr Voice’s unchallenged evidence, which we accept, was that he wanted to ensure that IST did not miss the opportunity to secure the Property in order for IST to develop and/or sell. We accept that if IST had not entered into the Option Agreement, Ms Voice would have sold the Property on the open market. The Business Plan confirmed that “The option agreement also allows the company to purchase the property without entering into a bidding war with rival developers.” We further accept that a property development company, having identified a significant potential property development opportunity, would seek to prevent third parties from acquiring, developing and turning a profit in relation to that property. Some form of option agreement is not untypical in the property development industry and accords with standard commercial practice but in this instance an untypically high grant price of £4.65m (representing nearly 50% of the Property value) was paid by IST.

There was no evidence of any negotiations between IST and Ms Voice to agree a lower grant price (reflecting, in our judgment, the reality of Ms Voice’s control of IST’s parent company) nor any evidence that Mr Voice would have entered into a similar Option Agreement with an unconnected third party. We consider that, particularly in light of Mr Voice’s experience in the property development trade, that the payment of the high grant price and way in which the Option Agreement was structured was intrinsically linked to the pressing need to provide drawable funds to Ms Voice rather than for the sole purpose of preventing the sale of the Property to a third party. Structuring the Option Agreement in this way provided IST with a source of funds such that during the option agreement period it could continue to make significant payments to Ms Voice that did not impact on IST’s operating results nor create additional loans to a participator that would incur a tax charge under s455 Corporation Tax Act 2010.

Mr Voice was clear in his evidence that he did not want IST to acquire the Property outright as he did not want to finance the purchase with debt as the Property would not be generating any income during the lengthy planning phase and “Purchase by way of an Option secured the property, and the development opportunity, for the business and afforded the company more time to obtain the necessary planning permissions and to raise the necessary funds to fully purchase the property and to carry out the development works.” Mr Voice accepted in cross-examination that one of the reasons for the Option Agreement was to provide IST with more time to raise the funds. The unchallenged evidence of Mr Voice, as confirmed by the accounts, was that IST had insufficient funds to purchase the Property outright, it only held a cash balance of £45,565 at the time the Option was granted. We accept that, in isolation, providing IST with more time to raise funds to develop the Property would be considered as an integral part of the IST’s trading activity and in accordance with standard commercial practice but we find this common commercial purpose undermined by the high option price paid which was in effect funding by way of ‘internal debt’ (a loan to Ms Voice). We find that, whilst the Option Agreement did provide IST with more time to raise funds, its primary purpose was to provide IST with a “pool of funds” from which Ms Voice was able to continue to draw down not insignificant sums on an annual basis.

We agree with IST, and the evidence was clear on this point, that the Option Agreement did not grant Ms Voice somewhere to live as she continued to own the freehold of the Property and continued to occupy the Property as of right. That conclusion is correct as a matter of the law of Real Property.

In light of the conclusion we have reached at paragraphs 103 to 109 that IST also had three other purposes for acquiring the Property via the Option Agreement means that IST’s appeal fails as the Property was not acquired “exclusively” for one of the specified purposes and we are not required to make a decision on whether Ms Voice was permitted to occupy the Property. However, as the matter was argued before us, we have proceeded to consider the matter and reach a conclusion on this alternative ground.

As stated above, it was not disputed that Ms Voice was a non-qualifying individual for the purposes of SDLT and ATED, who occupied the Property on each day within the chargeable periods until IST exercised the Option and acquired the freehold interest.

HMRC submitted that because Ms Voice occupied the property following the Option Agreement, she was permitted to occupy the Property such that the interest cannot be considered to have been acquired exclusively for the qualifying business purpose. HMRC rely upon the fact that IST voluntarily entered into the Option Agreement which provided that Ms Voice would continue to occupy the Property until the Option was exercised and there is nothing in s138(3) of FA 2013 which states that it is the purchaser that must permit a non-qualifying individual to occupy. Paragraph 5(2) simply requires that there is some party who has the power to permit or revoke occupation, and that person permits the non-qualifying individual to occupy. IST voluntarily entered into a legal agreement to acquire an interest in the Property, and it was clear by the terms of that agreement that Ms Voice would continue to occupy the Property until the Option was exercised. Therefore, in addition to there being an intention that a non-qualifying individual would be permitted to occupy the Property, a non-qualifying individual was, in fact, permitted to occupy.

Mr Sykes contended that had it been intended to subject purchasers to higher-rate SDLT and ATED simply if “a non-qualifying individual will be occupying a dwelling on the land”, paragraph 5(2) would have said so. The permission element must indicate that it is being given by a party who is in a position to meaningfully give it through their real control of who may use the property. That contention is supported by established case law. We agree with Mr Sykes’ submissions.

In Tophams Ltd v Sefton (Earl) [1967] 1 A.C. 50 at 68, Lord Guest said:

“Apart altogether from authority I would think that outside the sphere of purely polite social language, the word “permit”, used even between laymen bent on serious business or other affairs intended to have legal consequences, would be used as a word connoting on the part of the one whose permission is asked the right effectively to refuse and on the part of the applicant the necessity to ask for and obtain permission, so as lawfully to undertake his proposed course of action. This, in my view, is its legal meaning.”

The meaning of the “permit” was considered by Atkin LJ in Berton and Others v Alliance Economic Investment Company [1922] 1 K.B. 742. He said at [755]:

“Now the words 'permitting and suffering' do not bear the same meaning as 'knowing of and being privy to'; the meaning of them is that the defendant should not concur in any act over which he had a control."

And at [759]:

“To my mind the word ‘permit’ means one of two things, either to give leave for an act which without that leave could not be legally done, or to abstain from taking reasonable steps to prevent the act where it is within a man’s power to prevent it.”

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 Ms Voice occupied the Property. The evidence on this point was clear and we accept it: it is and has always been IST’s position (confirmed in correspondence and witness evidence) that Ms Voice occupied the Property as of right in her capacity as freeholder.

HMRC alternatively contended in their Statement of Case at paragraph 129: “that, by voluntarily entering into an agreement which allowed, or did not prevent, the occupation, [Ms Voice] was permitted to occupy the Property”. We can deal with this point in short order. We cannot find any support for such an interpretation of “permitted” in the established case law.

Whilst it is unnecessary for us to determine “who permits”, we agree with Mr Sykes that the strong implication is that this is the purchaser. We agree with the Tribunal in Hopscotch Limited v HMRC [2019] UKFTT 288 (TC) where the “non-qualifying individual” condition was stated at [25] as being that:

“the taxpayer must show that it did not permit a “non-qualifying individual” to occupy the property”

The natural reading suggests that the requirement relates to the control that the purchaser had over the property. As Ms Voice’s occupation of the Property was as of right as the freeholder this was beyond IST’s control and so it cannot have permitted the occupation. This is, correctly in our view, reflected in HMRC's guidance at SDLTM09660 “Scope: when is Stamp Duty Land Tax (SDLT) chargeable: higher rate charge for acquisitions of residential property by certain non-natural persons FA03/S55/SCH4A”:

For all the reasons set out above, IST’s appeal is dismissed. IST’s acquisition of the Option to purchase the Property is chargeable to SDLT at the rate of 15% per paragraph 3 of Sch 4A of FA 2003. IST was not entitled to relief from ATED by virtue of s138 FA 2013 and the closure notices issued under paragraph 23 of Schedule 10 FA 2003 are confirmed as varied.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.