HMRC SDLT: SDLTM04042 – Stamp Duty Land Tax on de-enveloping transactions

Stamp Duty Land Tax on De-enveloping Transactions

This section of the HMRC internal manual provides guidance on Stamp Duty Land Tax (SDLT) related to de-enveloping transactions. It explains the principles and concepts involved in these transactions.

  • De-enveloping refers to the process of transferring property from a corporate entity to an individual.
  • SDLT implications must be considered during de-enveloping to ensure compliance with tax regulations.
  • Guidance is provided on calculating the correct amount of SDLT payable.
  • Examples of common de-enveloping scenarios are included for clarity.

Stamp Duty Land Tax on De-enveloping Transactions

When companies own properties, they may want to ‘de-envelope’ them for various reasons. This process can help them and the individuals they distribute the properties to avoid the Annual Tax on Enveloped Dwellings. De-enveloping often takes place through a capital distribution to shareholders after the company has been liquidated. The tax implications of this de-enveloping depend on whether shareholders provide any form of consideration for the property being transferred.

Two Scenarios Where HMRC Does Not Consider Consideration Given

There are two scenarios in which HM Revenue & Customs (HMRC) will determine that no consideration has been given by shareholders during the transfer of property:

  • No Debts Scenario: When the company has no debts, meaning its only asset is the property, and it has no liabilities aside from the issued share capital. In this case, shareholders have not given any form of consideration for the property, resulting in no Stamp Duty Land Tax (SDLT) being due.
  • Debt Owed to Shareholders: If the company has debts but those debts are owed only to the shareholders, HMRC’s previous guidance still holds. This situation means that no consideration has been given, and therefore, there is no SDLT liability.

When Third-Party Debt is Involved

If a company holds a loan from a third party that is secured against the property at the time of liquidation, the situation changes. When the company transfers the property to shareholders under this condition:

  • If shareholders assume the liability of that third-party debt, it will create a liability for SDLT under paragraphs 1 and 8 of Schedule 4 FA 2003.

Repayment of Third-Party Debt by Shareholders

There may be times when shareholders resolve third-party debts before the company’s liquidation. This could occur through:

  • Investing more money by subscribing for additional share capital.
  • Converting the third party’s loan into a loan owed to the shareholders themselves.

In such cases, it is possible that no SDLT will apply when the property is distributed since it can be seen as similar to the prior two scenarios where no consideration was given. The exact details of each situation will influence the SDLT obligations.

Understanding Section 75A FA 2003

Section 75A of the Finance Act 2003 may come into play when a shareholder gives the company funds to pay off its debts before acquiring the property. This raises questions about the relationship between these actions and the eventual transfer of the property. The applicability of section 75A will depend on the specifics of each case.

Distinguishing Between Different Cases

There are different circumstances under which the repayment of debt may or may not be part of the transfer process:

  • If a debt is paid off as part of the process to transfer the property, section 75A may apply.
  • If the debt repayment happens independently of the property transfer, section 75A may not apply.

To understand when section 75A is relevant or not, more detailed guidance can be found in SDLTM09050, which offers examples and clarifications on the topic.

Further Information and Guidance

More detailed information on the non-cash consideration in the context of property transfers when winding up a company can be found in SDLTM04043.

The guidelines around Stamp Duty Land Tax for de-enveloping transactions highlight the importance of understanding whether any consideration is given during property transfers, particularly when debts are involved. The company’s financial situation and the nature of the debts play a critical role in determining the SDLT implications.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM04042 – Stamp Duty Land Tax on de-enveloping transactions

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Written by Land Tax Expert Nick Garner.
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