SDLTM04042 | 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.

For further guidance on the application of section 75A, including examples of when it will and will not apply, see SDLTM09050.

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