HMRC SDLT: SDLTM30220 – Application: Companies: Deemed market value FA03/S53

Principles and Concepts of Deemed Market Value

This section of the HMRC internal manual discusses the application of deemed market value for companies under FA03/S53. It provides guidance on how to determine the market value of a property for tax purposes when a transaction does not reflect the open market value.

  • Explains the concept of deemed market value.
  • Details the application process for companies.
  • Clarifies tax implications under FA03/S53.
  • Offers examples to illustrate the principles.

Understanding Section 53 of the Finance Act 2003

What is Section 53?

Section 53 of the Finance Act 2003 (FA03/S53) addresses situations where a property is transferred between an individual or company (the vendor) and a company that is connected to them (the purchaser). In such cases, the tax consideration applied will not be lower than the market value of the property on the date of the transaction, regardless of whether any actual payment or consideration is made.

When Does This Apply?

S53 applies in two specific scenarios:

  • When a vendor transfers property to a connected company and receives shares in return as part of the consideration.
  • When the vendor sells a property to a connected company, and the value of the transaction is not equal to the market value of the property.

Understanding Connected Persons

The term ‘connected persons’ is defined in the Corporation Tax Act 2010, Section 1122. This refers to individuals or companies that have certain relationships, such as family ties or business ownership links. Essentially, if you are connected to a company, any transactions you have with it will be viewed differently for tax purposes.

What About Chargeable Consideration?

Normally, if a property is transferred and no payment is made, you might assume that there is no chargeable consideration. However, under Section 53, that is not the case. The market value is used to determine the chargeable consideration instead.

Exemptions from Market Value Imposition

Section 54 of FA03 (FA03/S54) lists certain conditions under which the market value will not apply, and therefore no tax will be imposed based on this value. These situations include:

  • If the company retains the property as a trustee to manage a trust.
  • If the company acts as a trustee and the vendor is only linked to the company as the settlor under the Corporation Tax Act.
  • If the vendor is a company, and the transfer is part of distributing assets. This can happen whether the company is being wound up or otherwise.

Important Conditions for Exemptions

For these exemptions to apply, the subject of the transaction has specific requirements:

  • The property or interest involved should not have been part of any group relief claims made by the vendor in the last three years.

What Happens if an Exception Applies?

If one of the exemption criteria is met, then stamp duty land tax will only apply to the actual chargeable consideration that was paid, rather than the market value of the property being transferred.

Clarifying Terms

Here are some definitions that help clarify the context:

  • The term “company” refers to any type of body corporate.
  • The term “shares” includes stock. In reference to ‘shares in a company,’ this also includes any securities issued by that company.

Practical Application of Section 53

Here’s a practical example to illustrate how Section 53 works:

Imagine John owns a piece of land worth £500,000. He decides to transfer this land to a company he runs with his brother. They do not exchange money directly for the land. Under Section 53, HM Revenue & Customs will consider the chargeable consideration of £500,000, even though no actual payment was made. The same holds if John transfers the land and receives shares valued at £500,000 in return.

Implications for Vendors and Companies

Vendors and companies should be aware that failing to correctly assess the market value can lead to higher tax liabilities. It is important for vendors to assess their connections with any purchasing companies. When connected persons are involved in a sale, the market value needs careful consideration to ensure compliance with tax regulations.

Additional Factors to Consider

Vendors also need to be mindful of how prior transactions could impact new ones, especially in relation to group relief claims. If a vendor has claimed group relief for a different transaction within three years of the new transaction, it may influence the applicability of market value considerations.

Final Notes

Tax laws can be complex and subject to change. Therefore, staying up to date with the latest regulations is essential for both individuals and companies involved in property transactions. Those who frequently engage in property transfers should consider seeking professional advice to ensure accuracy in valuations and compliance with tax obligations.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM30220 – Application: Companies: Deemed market value FA03/S53

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Written by Land Tax Expert Nick Garner.
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