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HMRC internal manual

Stamp Duty Land Tax Manual

Stamp Duty Land Tax on de-enveloping transactions

Stamp Duty Land Tax on de-enveloping transactions

Companies may look to ‘de-envelope’ a property for a number of reasons, including taking themselves and the persons to whom they distribute the property outside the scope of the Annual Tax on Enveloped Dwellings. Such de-enveloping may occur by a capital distribution to the shareholders following the liquidation of the company. The tax consequences of de-enveloping will depend on whether there is any consideration given by the shareholders for the transfer of the property.

There will be two situations where HM Revenue & Customs (HMRC) will not consider there to be any consideration given.

The first is where the company is debt free: its only asset is the property and there are no liabilities (other than issued share capital). In such a situation the shareholders have given no consideration directly or indirectly for the property and therefore there is no Stamp Duty Land Tax (SDLT) liability.

The second of these situations will be where there is debt but this debt is owed solely to the shareholder. This is a situation that HMRC has given its views on before and we confirm that the guidance in SDLT Technical News issue 5 (August 2007) still applies. The relevant part is replicated below.

However, where there is a third party (non-shareholder) loan secured on the property when the company is liquidated, the transfer of the property by the company on a distribution will attract SDLT under paragraphs 1 and 8 of Schedule 4 FA 2003 where there is an assumption by the shareholder(s) of liability for the debt.

There may be situations where a company had a third party debt that has been repaid as a result of shareholder action (either through the subscription for more issued share capital or by replacing the third party debt with shareholder debt), prior to its liquidation. In such cases it is possible that on distribution of the property there will be no charge to SDLT as it will be a distribution in similar circumstances to the first two situations outlined above.

However, section 75A FA 2003 could apply where the shareholder of a company provides funds to the company to allow it to discharge its debt, before acquiring the property from the company if those actions are involved in connection with that disposal or acquisition. Whether section 75A applies will depend on the facts of each case.

There will be cases where discharging the debt has not occurred as part of the arrangements for the transfer of the property from the company to the shareholders. Equally, there will be cases where the discharge of the debt was one of a number of transactions involved in connection with the disposal and acquisition of the property.

There is some judicial guidance that may assist the correct application of section 75A in the decision of the First-tier Tribunal (Tax) in the appeal of Project Blue Limited v The Commissioners of HM Revenue & Customs released on 5 July 2013 [TC/2011/08390].

For example, the decision (at paragraph 227) confirms that section 75A applies regardless of the purposes or motives of the parties:

“Whilst it is clear that the purpose of section 75A is to counteract the avoidance of SDLT, the provision contains no requirement that the taxpayer should have a tax avoidance motive or purpose as a precondition or defence to the application of the provision…Parliament obviously intended that the provision should apply regardless of motive”.

The Tribunal emphasised that each of the subparagraphs (a) to (c) of section 75A(1) should be construed in the context of the other subparagraphs, rather than as self-standing tests (see paragraph 238 of the decision). In a straightforward de-enveloping situation, the company should be ‘V’ and the shareholder(s) ‘P’.

As to whether in that case transactions are ‘involved in connections with the disposal and acquisition’, the Tribunal states amongst other things (paragraph 250 of the decision):

“The word “involved” denotes some form of participation (ie involvement). Thus, a transaction which is part of a series of transactions will not be “involved” with other transactions simply because it is part of a series or sequence of successive conveyancing transactions. The linkage must be more than merely being a party in a chain of transactions and the test must be more than a “but for” test (or, as the classicists would put it, a sine qua non test) otherwise the word “involved” would be deprived of significant meaning.”

See SDLTM04043 - Scope: How much is chargeable: Non-cash consideration: Transfer of property on winding up - loan from shareowners