UK and International Tax news
SDLT And De-Enveloping Transactions
Wednesday 15th January 2014
HMRC has recently issued guidance about the SDLT treatment of de-enveloping transactions, including where a company is liquidated and the property removed.
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 ATED. 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 are two situations where 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, and where the shareholders give no consideration directly or indirectly for the property.
- The second arises where there is debt but this is owed solely to the shareholder and there is a transfer of the property on a winding up. The loan, being secured by mortgage on the property, is not released but the lender/shareholder will now own the property post liquidation.
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 [paras 1 and 8 Sch4 FA 2003] if there is an assumption by the shareholder of the debt.
There may be situation where a company had 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 a case 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 situation outlined above.
However, s.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 s.75A applies will depend on the facts of each case.
There may 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. However HMRC has stated that where the discharge of the debt was one of a number of transactions involved in connection with the disposal and acquisition of the property, an SDLT liability may arise.
HMRC refers to the recent FTT case of Project Blue Ltd v CIR, the decision being released in July 2013 [TC02777 Appeal no TC/2011/08390].
In this case it was held that s.75A applied regardless of the purposes or motives of the parties: In particular, para 227 of the decision stated “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”.Contact Us