HMRC SDLT: SDLTM09400 – Example 3 – Distribution by unit trust scheme

Principles and Concepts of SDLTM09400

This section of the HMRC internal manual, titled “SDLTM09400 – Example 3 – Distribution by unit trust scheme,” provides guidance on the distribution mechanisms within unit trust schemes. It outlines the tax implications and compliance requirements for such distributions.

• Explains the distribution process by unit trust schemes.
• Details tax implications for involved parties.
• Provides compliance guidelines for unit trust schemes.
• Offers examples to illustrate key concepts.

SDLTM09400 – Example 3 – Distribution by Unit Trust Scheme

This example was introduced on 14 May 2021.

Overview of the Scenario

In this example, two companies, Unitholder 1 Limited and Unitholder 2 Limited, are foreign firms that belong to the same group for Stamp Duty Land Tax (SDLT) purposes. They are the only unitholders of the Mansion Unit Trust, which is a type of collective investment scheme known as a unit trust.

• Unitholder 1 Limited owns 99% of the units in the Mansion Unit Trust.
• Unitholder 2 Limited owns the remaining 1% of the units.

The Mansion Unit Trust holds a single property valued at £20 million, and it has no outstanding debts or loans.

Transaction Steps

Here’s how the transaction unfolds:

• Unitholder 1 Limited sells all of its units in the Mansion Unit Trust to Estate 1 Limited.
• Unitholder 2 Limited sells its units to Estate 2 Limited.
• Both Estate 1 Limited and Estate 2 Limited are UK-based companies and are part of the same group as the unitholders.
• Following the sale, the property held by the Mansion Unit Trust is distributed to the unitholders at no cost. As a result:
• Estate 1 Limited receives a 99% interest in the property.
• Estate 2 Limited receives a 1% interest in the property.
• The Mansion Unit Trust is then liquidated.
• Soon after, Estate 1 Limited purchases the 1% interest in the property from Estate 2 Limited for an amount equal to 1% of the property’s value.

Analysis of the Transaction

SDLT on Actual Land Transactions

• There is no SDLT due on the distribution of the property since no payment (consideration) is involved.
• When Estate 1 Limited buys the 1% interest from Estate 2 Limited, SDLT may be payable based on either the purchase price or the market value of the property interest, whichever is higher.
• However, since the two estates are in the same SDLT group, they can make a claim for group relief, eliminating the SDLT liability.

SDLT Under Section 75A

Under Section 75A of the SDLT rules, V is the Mansion Unit Trust, as it is the original holder of the property, and P is Estate 1 Limited, since it ultimately gains full ownership of the property interest.

• The initial two unit transactions are ignored under Section 75A due to Section 75C(1).
• The relevant transactions for the scheme include:
• The distribution of the property to both Estate 1 Limited and Estate 2 Limited.
• The transfer of the 1% interest from Estate 2 Limited to Estate 1 Limited.
• The notional land transaction is treated as P (Estate 1 Limited) acquiring the entire property interest from V (Mansion Unit Trust).
• This transaction maintains its nature as a distribution (as detailed in SDLTM09290), allowing Section 54 to apply and remove any market value charge.
• For this notional land transaction, the chargeable amount is what Estate 1 Limited pays for the 1% interest from Estate 2 Limited (as stated in Section 75A(5)).
• While Estate 1 Limited can claim group relief for acquiring the 1% interest from Estate 2 Limited, it cannot claim it for the notional land transaction. This is because the notional transaction is considered between V (Mansion Unit Trust) and P (Estate 1 Limited), and since V is a unit trust scheme, it cannot be regarded as a company eligible for group relief under Section 101 FA2003.
• When looking at the consideration on the notional transaction, the key amount is what Estate 1 Limited paid to Estate 2 Limited for the 1% property interest.

Comparison Test of Section 75A(1)(c)

This test assesses the consideration due. Since more SDLT would be owed on the notional land transaction compared to the actual land transactions, the comparison condition is satisfied. The SDLT owed is equal to 1% of the property’s value.

This example illustrates the application of SDLT in the context of unit trusts and the treatment of transactions among related entities under SDLT regulations. It highlights the importance of understanding how different transactions are treated for SDLT purposes, especially when dealing with distributions and transfers among companies in the same group.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM09400 – Example 3 – Distribution by unit trust scheme

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