On 20 December 2013, HMRC published new guidance on Stamp Duty Land Tax (SDLT) and de-enveloping transactions. ‘De-enveloping’ refers to the extraction of property held within companies and other entities, such as partnerships with corporate members and collective investment scheme. Following the introduction of annual tax on enveloped dwellings (ATED) in April 2013, which applies to single residential dwelling with a value of more than £2m, several such entities have considered ‘de-enveloping’ in order to mitigate this charge going forward.
Often the ‘de-enveloping’ takes place through a capital distribution of the property to the shareholders and then liquidation. The concern is always around whether the shareholders have provided any consideration as part of this distribution and thereby triggered an SDLT liability?
The new guidance sets out two situations where HMRC will weigh up whether no consideration has been provided. First, where the company is debt free, its only asset is property and there are no other liabilities within the company. Secondly, where there is debt, but that debt is owed solely to the shareholder. Unfortunately, in reality, these circumstances are probably the exception rather than the norm.
There still remains uncertainty where the entity has third party debt and/or shareholder debt which may be capitalised or repaid prior to the distribution e.g. through a share subscription. The concern is whether such actions could amount to scheme transactions such that the anti-avoidance provisions contained in s75A FA2003 apply. HMRC have reiterated that the application of section 75A will depend on the facts and circumstances of each case, and unfortunately there is no advance clearance procedure available with HMRC in this respect.
It also remains unlikely that HMRC will issue any more definitive guidance on this matter, until the court case Project Blue is finalised, and this is likely to run for quite a while yet – it is currently under appeal from the First-tier Tribunal. In the meanwhile, with the advent of capital gains tax on non-UK resident owners of UK residential property due to come in April 2015, affected entities will need to take a long hard look before deciding whether ‘de-enveloping’ is worth undertaking.