HMRC SDLT: SDLTM09420 – Example 5 – De-enveloping from company

De-enveloping from Company

This section of the HMRC internal manual discusses the concept of ‘de-enveloping’ from a company. It provides guidance on the tax implications and procedures involved when assets are transferred from a company to its shareholders.

• Explains the term ‘de-enveloping’ and its relevance in taxation.
• Details the steps involved in the de-enveloping process.
• Outlines the potential tax liabilities for companies and shareholders.
• Provides examples to illustrate the application of these principles.

Example of De-enveloping Property from a Company

Background

This example was introduced on 14 May 2021, to clarify how Stamp Duty Land Tax (SDLT) applies when a property is transferred from a company to an individual shareholder, particularly in scenarios involving debt.

The Scenario

Let’s consider Adam, who is the only shareholder of Company X. The company owns a property valued at £5 million. However, there is a £1 million debt secured against this property. Adam wants to take ownership of the property personally, meaning he wants to remove it from the company and hold it himself.

Understanding Chargeable Consideration for SDLT

When a property is transferred, any existing debt attached to it is considered chargeable consideration for SDLT. This is outlined in paragraph 8 of Schedule 4 of the SDLT legislation.

The Steps Taken by Adam

1. Investing in the Company: To pay off the £1 million debt, Adam decides to buy £1 million worth of new shares in Company X. This additional capital allows the company to repay the debt to the third party.

2. Repayment of Debt: With the £1 million raised from the new shares, Company X pays off the £1 million debt. Now, the property is free of any debt.

3. Liquidation of the Company: Adam then chooses to liquidate Company X. During the liquidation process, the debt-free property is transferred to him without any payment, which means he receives it for nil consideration.

Implications for SDLT

Since the property was distributed without any debts attached and Adam did not pay anything for it, there is no SDLT due from his perspective. However, we need to explore a principle known as section 75A of the SDLT regulations, which comes into play here.

Application of Section 75A

This section is relevant in transactions where various actions by the company and the individual are interconnected. Here’s how it works in this case:

1. Identification: Here, Company X is referred to as ‘V’ and Adam is referred to as ‘P’.

2. Scheme Transactions: The transactions involving scheme transactions are as follows:
– The subscription for new shares made by Adam. This action is significant and cannot be ignored because it’s an issue of new shares, not merely a transfer of existing ones. According to section 75C(1), it’s important as it shows intention.
– The liquidation process of Company X.
– The transfer of the property from Company X to Adam.

3. Chargeable Consideration on Notional Transaction: The assessment of SDLT in this scenario involves calculating the chargeable consideration on what is termed as a notional transaction. Here’s what we need to consider:
– The highest single amount given by any individual as consideration for any of the scheme transactions.
– The total amount received by Company X (V) or anyone connected to it, for any of the transactions.

In this particular situation:
– The £1 million Adam invested in new shares is viewed as consideration for a scheme transaction, as it is part of the overall scheme that allows the property to go debt-free to him.

4. Total Amount for SDLT: Since there are multiple scheme transactions, the aggregate amount of SDLT payable amounts to nil, considering no SDLT is due on the liquidation and the property transfer, due to the nil consideration.

However, because the £1 million from Adam is noted as consideration, SDLT applies on the notional land transaction value, which effectively means that SDLT on £1 million is due as per section 75A.

Summary of Key Points

– Adam, the sole shareholder of Company X, aims to transfer a valuable, debt-free property from the company to himself.
– He does this by raising funds to clear the existing debt and subsequently liquidating the company.
– Even though he receives the property without direct payment, section 75A kicks in to ensure that SDLT is applied based on the shares he subscribed for.

This example illustrates how transactions involving properties, companies, and shareholders are intricately linked and how SDLT is calculated even in cases of debt and direct transfers.

For more detailed information and guidance on SDLT and similar examples, please visit SDLTM09420 – Example 5 – De-enveloping from company.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM09420 – Example 5 – De-enveloping from company

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