UT (Tax & Chancery) UT/2024/000092 - [2025] UKUT 00331 (TCC)

The FTT made findings of fact at [5] – [26] and at various paragraphs in its discussion of the issues. The following is a summary of the FTT’s findings of fact.

The Appellant was a subsidiary of Woolcastle Ltd with 99 of its 100 shares owned by Woolcastle Ltd. The remaining share was held by Ms Voice. Ms Voice owned 366 of the 616 ordinary shares in Woolcastle Ltd. The remaining 250 shares were held equally by her son, Mr Voice, and her daughter.

Ms Voice had been a director of the Appellant since 1993 and at all material times has remained a director. Mr Voice became a director in March 2013. He ran the Appellant from that date until he resigned in July 2019.

Mr Voice considered that prior to his appointment as a director the Appellant had been operating in a less than productive manner. Ms Voice had been drawing substantial funds from the Appellant, between £1m and £3m per year. In March 2014, Ms Voice had an overdrawn director’s loan account in the sum of £636,955. At that time she had a pressing need for funds. She owned and resided at the Property. In 2014 the Property was in a state of disrepair and substantial funds would be required to refurbish the Property. The disrepair and Ms Voice’s health issues contributed to her intention to sell the Property.

Mr Voice was aware that Ms Voice intended to sell the Property to “ease her financial situation”. He decided that the Appellant should acquire the Property because it represented a good development opportunity. In particular, he considered that a basement redevelopment conversion could add significant value to the Property. However, the Appellant did not have funds to acquire the Property outright and he did not want to finance the purchase with debt as the Property would not be generating any income during what he anticipated would be a lengthy planning phase. As at March 2013, the Appellant had a cash balance of only £45,565.

Mr Voice obtained preliminary plans from a firm of architects for three redevelopment options. The options were: refurbishment with the addition of a large basement; refurbishment with the addition of a smaller basement; and refurbishment without the addition of any basement. He obtained an informal valuation of the current and projected values of the Property upon redevelopment. A formal business plan was also drawn up. The current value of the Property was put at £9.3m. The projected value following a refurbishment was put at £13m and the value if the Property was refurbished and enlarged was put at £15m.

There was a board meeting on 1 March 2014 at which Ms Voice and Mr Voice as directors decided to proceed by way of the Option Agreement and Mr Voice was instructed to prepare all the documentation. The price to be paid for the Option was £4,650,000 and the purchase price was £9,300,000. The price paid for the Option would form part of the purchase price if the Option was exercised. The Option was exercisable within a period of 3 months from a date 5 years after the date of the Option Agreement and was freely assignable by the Appellant. The Property was to be sold with vacant possession on completion following exercise of the Option.

There was no real risk that the Appellant would not exercise its rights under the Option Agreement. The effect of the Option was that Ms Voice would be able to access the funds comprising the Option Sum immediately whilst continuing to live at the Property.

The FTT accepted at [100] that the Appellant fully intended to develop the Property on a commercial basis. The Appellant was granted planning permission on 18 April 2017. However, it could not exercise the Option to acquire the freehold until 2019. By 2019, the property market had entered a state of decline. A new valuation report in March 2019 put the value of the Property at £7.5m in its existing state and £11m post-development. This meant that the proposed development was no longer viable.

The Appellant gave notice to Ms Voice exercising the Option on 26 June 2019 and completed the purchase of the freehold of the Property on 22 July 2019. The Property was then put on the market for £11m and was eventually sold on 3 January 2020 for £6.9m.

The Option Sum was payable to Ms Voice on the date of the Option Agreement “by direct credit or such other means as the parties may agree”. In the event, it was left outstanding as a loan and drawn in instalments. If the Appellant had not paid some money up front, Ms Voice would have sold the Property on the open market. There was no reason to think that she could not have done so quickly.

In total, Ms Voice drew down £1,189,802 of the loan during the 12-month period immediately following the grant of the Option. A sum of £636,955 was drawn immediately to clear her overdrawn loan account. A further £552,847 was drawn in the following 12 months. The outstanding balance earned interest at 4% pa above the Barclays Bank base rate according to the terms of the Option Agreement.

The Appellant made an SDLT return on 14 April 2014 on the basis that it had acquired an interest in residential property. The return did not take into account any higher rate tax payable. HMRC subsequently enquired into the rate of tax on the acquisition and issued an assessment on the basis that the transaction was subject to the higher rate applicable to higher value residential transactions. They also raised the position in relation to ATED. The Appellant subsequently submitted ATED returns for the periods ending 31 March 2015, 2018 and 2020. In each case relief was claimed and the returns showed no ATED as due. Enquiries were opened into the ATED returns and closure notices were issued charging ATED on the basis that no relief was due, save that HMRC accepted that relief from ATED was due from 22 July 2019 onwards when the option was exercised. That was because HMRC accepted that for the period after 22 July 2019, the Appellant held the Property exclusively for the purposes of its property development trade. We understand that there were no assessments to ATED for periods ending 31 March 2016, 2017 and 2019 because of time limit issues.

It was common ground, recorded by the FTT at [68] and [100], that the Appellant carried on a property development trade between 27 March 2014 and 3 January 2020 for the purposes of paragraph 5(1)(b) Schedule 4A FA 2003 and section 138(1)(a) FA 2013. We understand that it was also common ground that when the Appellant acquired the freehold interest in the Property, it intended to develop it on a commercial basis and qualified for relief from ATED. There were therefore two issues before the FTT recorded at [69] and both were relevant to SDLT and ATED:

The second issue was determined in favour of the Appellant at [112] – [121] of the Decision and there is no appeal by HMRC on that issue.

The FTT made findings as to the purposes for which the Appellant entered into the Option Agreement at [99] and [103] to [110]. It stated its overall findings at [99] as follows:

The FTT went on to describe the three purposes in the following paragraphs:

The FTT concluded at [111] that the existence of these other purposes meant that the Appellant had not acquired the Option exclusively for the purpose of development or redevelopment and resale.

In identifying the three other purposes the FTT relied on the purpose for entering into the Option Agreement (at [103]), the high Option Sum payable for the Option (at [108]) and the way in which the Option Agreement was structured (also at [108]).

Whilst the FTT found that three other purposes existed, it also found in [106] and [109] that one of the primary purposes of the Option Agreement was Ms Voice’s pressing need for funds and to provide a means by which Ms Voice could draw funds from the Appellant. It is not clear to us why the FTT made findings as to the primary purpose of the Option Agreement. The provisions simply require a finding as to whether the Option was acquired solely for the purpose of development or redevelopment and resale.

The FTT also recorded at [106] its view that the Option Agreement was unusual in that it provided that the Option Sum was to be part of the purchase price rather than a separate payment:

The FTT found that there were other reasons for the Appellant entering into the Option Agreement. At [107] and [108] it found that one reason was to prevent the sale of the Property by Ms Voice to a third party and also that there was an untypically high grant price for the Option:

At [109], the FTT found that another purpose of the Option Agreement was to provide the Appellant with time to raise funds to acquire and develop the Property but that the primary purpose was to provide a “pool of funds” from which Ms Voice could draw:

The reference in the last sentence to providing the Appellant with a “pool of funds” is not entirely clear. The funds had to be generated by the Appellant before Ms Voice could draw upon those funds. The FTT must have meant that the primary purpose of the Option Agreement was to provide Ms Voice with an entitlement to draw sums from the Appellant, although in practical terms those withdrawals would be limited to the cash resources held by the Appellant.

At [110] the FTT found that providing Ms Voice with somewhere to live while she looked for new accommodation was not a purpose of the Option Agreement:

The FTT expressed its conclusion at [111]:

The FTT went on to consider at [112] to [121] whether Ms Voice was permitted to occupy the Property as a dwelling for the purposes of paragraph 5(2) and section 138(3). If so, the Option would not be treated as being acquired exclusively for the purpose of development or redevelopment and resale in the course of a property development trade. Given the FTT’s finding in relation to the purposes for which the Option was acquired, it did not strictly need to address this issue.

In the event, the FTT found that the Appellant did not have any right to possession of the Property arising out of the Option and did not permit Ms Voice to occupy the Property. Ms Voice occupied the Property by virtue of her interest as the freeholder. As indicated above, HMRC do not challenge that finding. They do, however, challenge by way of cross-appeal the FTT’s conclusion at [110] that another purpose of acquiring the Option was not to restrict her rights of occupation during the 5-year option period.