SDLTM09420 | Example 5 – De-enveloping from company

(This example was introduced on 14 May 2021)

Adam is the sole shareholder in Company X. This Company holds property worth £5 million but there is a third-party debt secured over that property to the amount of £1 million. Adam wishes to take the property out of the ownership of the company and hold it directly. If a property is distributed subject to existing debt, the amount of that debt would be chargeable consideration for SDLT under paragraph 8 Schedule 4,

In order to satisfy the third-party debt, Adam subscribes for £1 million of new shares in Company X and then the capital introduced of £1 million is used to repay the existing debt with the third party. The property held in Company X is now debt free, so Adam decides to liquidate Company X. Upon the liquidation, the property is distributed to Adam for nil consideration.

As the property was distributed debt free and no consideration was given for that distribution, no SDLT arises.

However, section 75A applies as follows:

• V is identified as Company X and P will be Adam.

• The scheme transactions are:

  • The subscription for new shares – this is not ignored for the purposes of s75A as it is an issue, rather than a transfer of shares – s75C(1). As the subscription for new shares was only done so that the third-party debt could be repaid and the property be distributed debt free, the subscription for new shares is involved in connection with the disposal and acquisition of the chargeable interest.

  • The liquidation of Company X

  • The transfer of the property from Company X to Adam

• The chargeable consideration on the notional transaction is the largest amount or aggregate amount

  • given by or on behalf of any one person as consideration for any of the scheme transactions, or

  • received by or on behalf of V, or a person connected with V, as consideration for any of the scheme transactions.

• In this case, the £1 million given for the subscription of new shares is consideration for a scheme transaction.

• There are a number of scheme transactions and the sum of the amounts of SDLT payable in respect of the scheme transactions, which is nil, is less than the amount that would be payable on a notional land transaction effecting the transfer from Company X to Adam. SDLT on £1 million is therefore due under s75A.