Distributions in Specie of UK Residential Property

by Alan Zeffertt | Feb 20, 2023 | Property Law

Does an offshore or overseas company pay SDLT (stamp duty land tax) on a distribution in specie of UK residential property?

Many owners of residential property wish to de-envelope their UK residential property. There is usually no advantage in retaining ownership in an overseas entity since there are not usually any tax advantages in doing so, and the administrative costs of maintaining such companies can be high.

Distributions of a property are exempt from stamp duty land tax (SDLT) if it is a voluntary transfer for no chargeable consideration.

De-enveloping or transferring property out of companies into the names of the shareholders or beneficial owners is usually dealt with in one of 2 ways:-

Distribution in specie (also known as a distribution in kind).

The Directors can authorise this if the articles of association permit it. If they don’t then consider changing the articles by passing a special resolution. There should be no SDLT arising where the company has no external debt, for example a mortgage over the property to secure an advance or liability. If there is debt owed to a shareholder, then HMRC will not normally regard this as the assumption of a liability or the giving of consideration on transferring the property to the shareholder.

There are various ways of dealing with any such debt and consideration needs to be given whether to remove such debt either before or at the time of de-enveloping the property in order to avoid it being regarded as a scheme transaction.

If it is desired to wind up the company after the assets have been distributed, this can usually be done quite simply by resolving to discontinue and filing the necessary declaration with the relevant authorities in the offshore jurisdiction.

Transfer of the property on a liquidation or winding up of the company.

A special resolution will need to be passed by the shareholders to wind up the Company voluntarily and the Liquidator will be authorised to distribute the surplus assets of the Company to the shareholders in specie. The articles of association should first be checked to ensure that there is authority to transfer the assets in specie. In most cases the liquidation should not involve any consideration and so should be exempt from SDLT.

In both of the above cases, care needs to be taken how to deal with the satisfaction or release of any shareholder or external debt in consideration of the transfer of the property.

Tax advice should be taken regarding other potential tax consequences which can arise out of the de-enveloping process, and in particular Corporation Tax on capital gains (CGT). In both of the above cases, the transfer of the property will usually be treated as a deemed disposal at market value.

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For an initial assessment of your case and an estimate of likely costs, please contact Alan Zeffertt on 020 7043 1621 or azeffertt@thirskwinton.co.uk

Disclaimer: The information on the Thirsk Winton LLP website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.

The tax benefits of ownership of property by onshore or offshore residents through
an overseas company have not only been removed but such companies are now more
heavily taxed.
Overseas companies must also now register at the UK Companies House as an
overseas entity disclosing information on a public register about beneficial owners or
managing officers. These rules also apply where the beneficial owner is a trustee of a
trust.

Now that companies are caught by tax rules relating to ATED (Annual Tax on
Enveloped Dwellings) which affects properties valued at as little as £500,000,
Corporation Tax currently at the rate of 25% and potentially Inheritance Tax, most
owners of offshore companies will wish to transfer their property out of the company
structure, usually into individual names or a trust. This can offer an opportunity for
some inheritance tax planning usually by making a lifetime transfer of the property
to family members.

The good news is that SDLT (stamp duty land tax) will be exempt in most cases
provided that the correct procedures are followed.
It is advisable to take tax advice on the range of potential taxes that can arise from
de-enveloping a property.

3 people from a company planning the sale of their business with a solicitor from thirsk winton

HOW TO DE-ENVELOPE

There are usually two ways of proceeding:

1. Pass a company resolution and transfer the property to the shareholders or their nominees by way of a distribution in specie (in kind). This will be exempt from stamp duty land tax (SDLT) provided that it is a voluntary transfer for no ‘chargeable consideration’.
2. Pass a resolution to put the company into voluntary liquidation and carry out a distribution in specie.
The second way will be the more costly since there will be the costs of the liquidator to take into account.

The articles of association must be checked to ensure that a distribution in specie is permitted. If not, the articles can be amended by passing a special resolution. The resolution must be carefully worded if exemption from SDLT is to be claimed. It should not be worded as a cash value dividend equal to the market value of the property to be settled by a transfer of assets.

In order to avoid having to pay SDLT, there should be no third party debt or mortgages over the property. The directors will need to check that the company has sufficient assets to make the distribution and there are no outstanding creditors other than any debt that may be owed to the shareholders themselves.

For overseas companies, a legal opinion may be required from lawyers practising in the jurisdiction as to the legality of the actions being taken in order to satisfy the requirements of the Land Registry.

Our expert solicitors will be pleased to advise and guide you through your transaction. Please contact Alan Zeffertt if you would like assistance:

E: azeffertt@thirskwinton.co.uk

T: 020 7043 1621

M: 07968 190951

Disclaimer: The information in this article is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.

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