HMRC SDLT: SDLTM09430 – Example 6 – Distribution followed by onward sale

Principles and Concepts of SDLTM09430

This section of the HMRC internal manual discusses the principles and concepts related to SDLTM09430, focusing on the scenario of a distribution followed by an onward sale. It provides guidance on the tax implications and procedures involved.

• Explains the process of distribution and subsequent sale.
• Details the tax obligations for involved parties.
• Offers examples to illustrate the application of rules.
• Clarifies the roles of distributors and sellers in tax reporting.

SDLTM09430 – Example 6 – Distribution followed by onward sale

Overview of the Example

This example describes how Blue Fire Limited, the parent company, handles the sale and distribution of properties from its subsidiary, White Water Limited, using a series of transactions.

Key Players

– Blue Fire Limited: The parent company.
– White Water Limited: A subsidiary that manages properties, including those used for rental and development.
– Freddie: An interested buyer focused only on the property rental aspect of White Water Limited.
– Fred Limited: A new holding company created to facilitate the sale.

The Situation

– White Water Limited owns properties, some of which are rented out while others are used for development.
– Freddie wants to buy White Water Limited, but only the parts related to property rental.

The Transaction Steps

1. Creating a New Company:
– Blue Fire Limited sets up Fred Limited, which sits between Blue Fire Limited and White Water Limited.
– This is done through a share-for-share exchange, allowing for an efficient transfer of properties.

2. Distributing Assets:
– White Water Limited transfers the properties and trade relevant to Freddie to the newly established Fred Limited.

3. Transferring Shares:
– The shares of White Water Limited are then returned to Blue Fire Limited, making it so that Fred Limited has no subsidiary relationships.

Understanding SDLT (Stamp Duty Land Tax)

– No SDLT Payable:
– There is no SDLT required here because the value of SDLT from these transactions is zero.
– The distribution of properties from White Water Limited to Fred Limited does not invoke a market value charge as per section 53 of the Finance Act 2003, specifically because the relevant conditions in section 54 also apply.

– Scope for SDLT:
– The other transactions involved in this setup do not fall under SDLT requirements either.

Purchase of Fred Limited by Freddie

Once the transfer of properties is complete, Freddie buys all the shares in Fred Limited.

Application of Section 75A

Section 75A plays a significant role in this example, and the key dimensions are as follows:

1. Disposal of Chargeable Interests:
– White Water Limited has given up chargeable interests, which consist of the rental properties. This makes it the ‘V’.

2. Acquisition of Chargeable Interests:
– Fred Limited receives these chargeable interests, and this designates it as ‘P’ in the transaction.

3. Interconnected Transactions:
– Several linked transactions happen in conjunction with White Water Limited’s disposal and Fred Limited’s acquisition. These include:
– The distribution of properties to Fred Limited.
– The transfer of White Water Limited’s shares back to Blue Fire Limited.
– Freddie’s acquisition of shares in Fred Limited.
– Each transaction supports the others and allows Freddie to ultimately obtain Fred Limited with the desired properties.

4. Purchase Timing:
– It was planned that Freddie would purchase Fred Limited following the property transfer. Thus, this purchase is part of the scheme of transactions.
– This means that even though Freddie buys Fred Limited after the property transfer, it still counts as a scheme transaction according to section 75A(2)(d).

Notional Transaction Considerations

In this scenario, a notional transaction occurs between ‘V’ and ‘P,’ which implies various aspects:

– Higher SDLT Requirements:
– The notional transaction could result in a greater SDLT obligation than the real transactions.
– The final scheme transaction—the purchase of Fred Limited by Freddie—sets the effective date for the notional transaction, as indicated in section 75A(6).

– Market Value Charges:
– The hypothetical land transaction doesn’t create a charge based on market value according to section 53, since White Water Limited and Fred Limited are separate entities on the date of this notional transaction.
– They also do not qualify for group relief because they do not belong to the same group at that time.

Understanding Chargeable Consideration

– Determining Chargeable Consideration:
– The chargeable consideration for the notional land transaction represents the highest or total amount involved across the actual transactions, as stated in section 75A(5).
– In this case, it would most likely be the purchase amount that Freddie pays for Fred Limited’s shares.

– Section 75B Implications:
– This amount cannot be overlooked under Section 75B since Freddie’s share purchase is not simply a minor detail linked to the property transfer from White Water Limited.

Key Concepts to Understand

– Stamp Duty Land Tax (SDLT):
– SDLT is a tax applied to the purchase of property or land. In this case, there is no SDLT due because the specific transactions do not attract a market value charge.

– Section 75A and 75B:
– These sections of the legislation outline specific rules about how transactions are viewed in relation to SDLT and the idea of ‘notional transactions’ in terms of chargeable interests.

– Chargeable Interests:
– Properties that are subject to SDLT when they are transferred.

– Group Relief:
– A provision that allows companies in the same group to avoid SDLT when they transfer properties between themselves, not applicable in this case as White Water Limited and Fred Limited are not in the same group at the relevant time.

This example illustrates how careful structuring of company transactions can avoid SDLT liabilities while facilitating a targeted acquisition of specific assets.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM09430 – Example 6 – Distribution followed by onward sale

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