A recent decision of the High Court has potentially opened the door to minimise or eliminate SDLT on collective enfranchisement claims and to enable a reclaim of SDLT where this has already been paid.

The right to collective enfranchisement

Under the Leasehold Reform, Housing and Urban Development Act 1993 tenants with long leases have the right to collectively buy the freehold (and any intermediate leasehold interest) of their building.  The purchase is made by a so-called nominee purchaser, which is typically a special purpose company owned by the tenants who participate in the enfranchisement. 

There are currently no restraints on the constitution or set up of such a company.  This will change when, if ever, the relevant provisions of the Commonhold and Leasehold Reform Act 2002 come into force which provide that the collective enfranchisement can only take place through a Right to Enfranchise company (“RTE company”).

Stamp Duty Land Tax

Stamp Duty Land Tax (“SDLT”) is generally payable on land transactions above a certain value.  However, a relief applies when a transaction is entered into by an RTE company in pursuance of a right to collective enfranchisement.

Elizabeth Court (Bournemouth) Limited v H M Revenue and Customs (2008)

In this case the right to enfranchise was exercised by the relevant number of qualifying tenants through a company formed for these purposes.  It was structured so as to comply with the requirements for an RTE company.  The company sought relief from SDLT payable on its acquisition but this was refused by HM Revenue & Customs.  The company appealed against the decision.  The Special Commissioner held that relief from SDLT is not available in enfranchisement cases until the relevant provisions of the Commonhold and Leasehold Reform Act 2002 relating to RTE companies are brought into force.  While any company can currently act as a nominee purchaser, the SDLT relief will only be available to RTE companies. 

The company then appealed to the High Court.  The judgment was given on 16th October 2008.  The Judge, the Chancellor, the Rt Hon Sir Robert Andrew Morritt CVO, upheld the decision of the Special Commissioners on the claim as constituted and confirmed that although the company was an RTE company for the purposes of section 74 of the Finance Act 2003, it could not enter into the transaction “in pursuance of a right of collective enfranchisement” as defined in section 74(4)(b) of the Finance Act 2003 as “the right exercisable by an RTE company under … Chapter 1 of Part 1 of the Leasehold Reform, Housing and Urban Development Act 1993”.  This was simply not possible until the RTE provisions in the 1993 Act were brought into force. 

However, the interesting point is that the Judge Chancellor stated ‘obiter’ that he thought that in such situations and subject to the facts of each case, the nominee purchaser should be seen exactly as that – a nominee or trustee for each of the individual participating tenants.  This being so, the SDLT threshold of £125,000 would apply to each tenant.  He recommended that the tenants go back to the Special Commissioners for the reclaim for tax on that point.  The Judge said that he did not have the facts before him to be able to make a ruling on this present case.  He recommended that the tenants go back to the special commissioners to seek to reclaim the tax on that point.

Comment

The views of the Chancellor may be subject to challenge once there is a claim for relief brought upon that point, of which there are now likely to be many.  It is possible, if the government was sufficiently concerned, that they might try to plug what they might perceive to be a loophole, but this is unlikely as it was envisaged that all collective enfranchisement would be through an RTE company and that consequently relief from SDLT would be given.

The decision of the Chancellor presents an opportunity for both collective enfranchisement claims which have yet to be completed and also for those which have already been completed and where SDLT has been paid.  The facts of each case would need to be considered and, in particular, the way in which the ownership of the nominee purchaser and its interests have been structured.  In many cases, if  the nominee purchaser could be construed as holding as a bare trustee on trust for the participating tenants in certain proportions, then that ought to give a reasonable prospect of affording a viable claim for relief or refund against the Revenue.

We would like to thank David Southern, Counsel for the company, for providing details of this decision.

Christopher Sykes is a partner and Stephan Weber a Solicitor
Christopher Sykes is the author of “Leasehold Enfranchisement and the Right to Manage: A Practical Guide” which is available through Law Society Publishing

If you have any query, please do not hesitate to contact us on 020 3178 3770 or chris.sykes@sykesanderson.com.

Please note that this area of the law is a complex subject and you should not take or refrain from taking any step without full legal advice on your particular circumstances. The content of this article is of a general nature and no liability is accepted in connection with it or if any reliance is placed on it.