De-enveloping residential properties – SDLT implications

De-enveloping residential properties – SDLT implications

Mon 06 Jan 2014

Until the introduction of the annual tax on enveloped dwellings (ATED) there were tax advantages in having high value residential properties owned by a company rather than personally. Since 6 April 2013 ATED imposes an annual “charge” of between £15,000 and £140,000 on companies and other non-individual owners of UK dwellings with a value in excess of £2m. Owing to certain reliefs, for example for developers or lettings to unconnected persons, ATED most commonly applies where residences are occupied by the individual owners (e.g. shareholders) of the property holding structure.

Where the cost of the ATED “charge” outweighs the tax benefits of retaining the structure one way of extracting property is for the company to be placed in liquidation and the liquidator to make a capital distribution in specie of the property to the beneficial owner of the shares. This will involve a land transaction, giving rise to possible SDLT implications.

HMRC has confirmed that if the company is debt free or if all the company’s borrowings are owed solely to the shareholder there will be no charge to SDLT on the transfer of ownership resulting from the distribution in specie. HMRC also confirm that this treatment is possible where  the shareholder has provided funding to the company to enable it to discharge third party debt, so long as the circumstances are such that this has not been “involved in connection with” the liquidation. The application of this test has been considered at tribunal level and depends on the circumstances.

Where the company has a third party loan secured on the property when the company is liquidated and the shareholder assumes responsibility for paying the debt, there would be chargeable consideration to that extent, ordinarily resulting in a charge to SDLT.   Furthermore, where shareholder funding to repay third party debt has been “involved in connection with” the distribution then a particular SDLT anti-avoidance provision could apply, imposing a charge to SDLT.

Issues surrounding enveloped dwellings, ATED and planning can be complicated and the best course of action often depends on the circumstances surrounding the transaction, the relevant property, its ownership structure and the proposals overall.

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