The stamp duty land tax (SDLT) risk of de-enveloping property companies

FA 2003 section 75A is the main piece of SDLT anti-avoidance legislation that HMRC has at its disposal to attack certain schemes or arrangements which avoid SDLT. HMRC have specifically stated that section 75A may apply to certain ‘de-enveloping’ scenarios. ‘De-enveloping’ is the practice of extracting property from a company. This has become increasingly common over the last few years due to a raft of legislation which attacks UK property holding companies (ATED charges and 2017 IHT transparency rules to name a couple).

The ‘offensive’ scenario (taken from SDLTM09420)

HMRC have set out in their guidance a particular scenario where they would seek to invoke section 75A:

1. Adam owns offshore Company X.
2. The company holds a property worth £5m.
3. There is £1m of third-party debt secured on the property.
4. Adam wants to ‘de-envelope’ the property.
5. If the property is extracted while subject to the £1m of debt then Adam would be liable to SDLT on chargeable consideration of £1m (due to him taking on the debt of £1m as consideration).
6. Therefore (as an alternative), Adam subscribes for £1m of new shares in Company X.
7. Company X uses this cash injection to repay the debt.
8. Company is liquidated and no SDLT is payable because there has been no consideration.

How 75A works against the ‘offensive’ scenario

HMRC’s view is that section 75A thwarts Adam’s attempt to avoid SDLT. Broadly, they argue that the new share subscription was done in connection with the disposal of the chargeable interest by Company X and the acquisition by Adam. On this basis section 75A says that the chargeable consideration is the largest amount or aggregate amount given by or on behalf of any one person as consideration for any of the scheme transactions. Here they say that the £1m share consideration is consideration for a scheme transaction and therefore SDLT is due by Adam on this amount.

Forbes Dawson view

This can seem quite harsh as Adam’s planning seemed quite neat and would probably fall within the realm of ‘acceptable tax planning’ for other taxes. This highlights how effective section 75A can be in overturning SDLT planning when a series of steps is involved. Furthermore, Adam has faced the commercial disadvantage of actually having accessed £1m to subscribe for the shares. Section 75A does however make clear that the transactions do need to be ‘involved in connection with’ the disposal and acquisition. It may therefore be good practice for these kinds of property companies to be financed directly by shareholders from the outset where possible. This way any kind of ‘de-enveloping’ will not require the added step of paying off external finance – which seems to be the main cause of the section 75A issue. Clearly this point will be of limited use to all those shareholders who are currently seeking to de-envelope companies with external debt.




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