HMRC SDLT: SDLT Implications for Property Transfer to Connected Company: Example Analysis
SDLTM30224 – Application: Transfer to a Connected Company: Example 4
This section discusses the Stamp Duty Land Tax (SDLT) implications when an individual transfers freehold residential property to a company in exchange for new shares in another company. It examines the connections between the parties involved and how these affect the chargeable consideration based on market value.
- Determine if Individual A is connected to Company B under S1122 CTA 2010.
- Determine if Individual A is connected to Company C under S1122 CTA 2010.
- If not connected, the chargeable consideration is the market value of the shares at the residential property rate.
- If connected, S53 applies, and the chargeable consideration is the market value of the property.
- If the property’s market value is £275,000, this is the chargeable amount unless the shares’ market value is higher.
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Read the original guidance here:
HMRC SDLT: SDLT Implications for Property Transfer to Connected Company: Example Analysis
Stamp Duty Land Tax (SDLT) Guidance: Transfer to a Connected Company
Overview
When an individual transfers property to a company in exchange for shares in another company, different rules apply regarding Stamp Duty Land Tax (SDLT). This article explains these rules using a specific example to illustrate how the connections between the individuals and companies impact the SDLT calculation.
Example 4 Explained
Scenario: Individual A owns a residential property and decides to transfer this property to Company B. In return, Individual A receives new shares in Company C.
In this situation, there are several important considerations regarding SDLT:
1. Connections Between Parties:
– We need to determine if Individual A is connected to Company B based on the rules in Section 1122 of the Corporation Tax Act 2010 (CTA 2010).
– We also need to check if Individual A is connected to Company C using the same rules.
2. Market Value of the Property:
– Establishing the market value of the property being transferred is crucial because this value is used to calculate the SDLT due.
Determining Connections Under CTA 2010
Definition of ‘Connected’:
– In the context of SDLT and the Corporation Tax Act, ‘connected’ means that one person has a meaningful relationship with another that influences transactions between them. For example:
– Individual A may have significant control or influence over Companies B or C.
– Connections might arise from shareholding, directorship, or other business relationships.
Calculating Chargeable Consideration
The chargeable consideration is the amount used to determine how much SDLT is payable. The determination of this amount varies depending on whether Individual A is connected to Company B or Company C.
If Individual A is Not Connected to Company B or C:
– In this case, the chargeable consideration will be the market value of the shares received in exchange for the property.
– The SDLT will be calculated at the residential property rate based on this market value.
– Example: If the shares received are valued at £300,000, then SDLT will be charged on this amount.
If Individual A is Connected to Company B or C:
– If Individual A is determined to be connected, the rules under S53 of the Finance Act come into effect.
– Here, the chargeable consideration will be the market value of the transferred property rather than the shares.
– Example: If the market value of the property is £275,000, then the SDLT will be calculated on this amount at the residential property rate, regardless of the share’s market value.
Understanding the SDLT Rates
SDLT for residential properties is charged at different rates depending on the value of the property. Here are the main rates that apply:
– 0% on properties valued up to £125,000.
– 2% on the portion between £125,001 and £250,000.
– 5% on the portion between £250,001 and £925,000.
– 10% on the portion between £925,001 and £1.5 million.
– 12% on properties valued over £1.5 million.
What If the Property’s Value is Less Than the Shares’ Value?
If it happens that the market value of the property transferred is less than the value of the shares received, the chargeable consideration will be based on the higher value, which is the market value of the shares.
Example clarification:
– If the property is worth £200,000 and the shares are worth £300,000:
– If Individual A is connected to Company B or C, the SDLT will apply to £200,000 (property value).
– If they are not connected, SDLT will apply to £300,000 (share value).
Summary of Key Steps for SDLT Calculation
1. Determine Connections:
– Check if Individual A is connected to Company B or Company C according to S1122 of CTA 2010.
2. Assess Market Values:
– Find the market value of the property being transferred.
– Find the market value of the shares being received.
3. Calculate Chargeable Consideration:
– If Individual A is NOT connected to either company: apply the market value of the shares.
– If Individual A IS connected to either company: apply the market value of the property.
4. Apply Appropriate SDLT Rate:
– Use the applicable rates for residential property to determine the SDLT owed.
Further Considerations
It is worth noting that connected parties may have other implications for SDLT calculations. Specific reliefs and exemptions may apply based on various factors, including the circumstances of the transfer and any previous transactions involving the same parties.
– Relief Possibilities: Some transfers might qualify for relief under specific circumstances, which could reduce the SDLT liability. It’s advisable to seek guidance on circumstances that might apply to your situation.
– Professional Advice: Given the complexities involved in SDLT and connections, it can be helpful to consult with a tax advisor or legal professional to ensure compliance with all regulations and to optimise SDLT liability.
Practical Example for Better Understanding
Let’s illustrate this with a more detailed example:
Assume:
– A is transferring a property valued at £280,000 to Company B and receives shares in Company C valued at £350,000.
– A has a significant shareholding in both Company B and Company C, confirming a connection under S1122.
Steps taken:
1. Connections: A is connected to both B and C.
2. Market Value of Property: The property value is £280,000.
3. Chargeable Consideration Calculation: Since A is connected, chargeable consideration is £280,000, not £350,000.
4. Apply SDLT Rate: Based on the property value of £280,000, calculate SDLT:
– No charge on the first £125,000.
– Charge 2% on the amount between £125,001 and £250,000.
– Charge 5% on the amount between £250,001 and £280,000.
As a result, Individual A will pay the calculated SDLT based on the property’s market value, effectively ensuring compliance with the SDLT rules for connected transactions.
Understanding these principles is crucial for individuals and businesses engaging in property transactions that involve shares, ensuring that they meet their tax obligations accurately.
Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLT Implications for Property Transfer to Connected Company: Example Analysis
