SDLT on in specie distributions

There are often cases where it is beneficial to transfer assets from one company to another as a distribution. When property is transferred, then this leads us to consider the stamp duty land tax (SDLT) rules around the transfer.

The issue

Many readers will be aware of a rule of thumb which states that there is no SDLT on distributions in specie because there is no consideration. This may generally be the case, but the rules framework is more complicated than this and over reliance on the rule of thumb can lead to mistakes.

The market value rule

The above rule of thumb is misleading as there is a market value rule for purchases by connected companies. This means that, prima facie, if a subsidiary distributes a property to its parent as a distribution in specie (for no consideration) then the parent must pay SDLT on the market value of the property. However, often this position will not apply due to an exemption from the main rule.

This exemption is included in "Case 3" where "the vendor is a company and the transaction is, or is part of, a distribution of the assets of that company (whether or not in connection with its winding up)". This is the bit that stops a dividend in specie being subject to SDLT, and not the fact that there is no consideration.

There is also another trap to be aware of here. The market value exemption would not apply if, within the previous three years, the subsidiary had claimed group relief in respect of its receipt of the asset. Therefore, in order to conclude that no SDLT is due you need to understand the three-year history of the asset in question. If the asset has been held for over three years, or if it was acquired from a third party, then there should be no problems here.

The "dividend in specie trap"

Some lawyers seem very keen to document dividends in specie in a way that could give rise to an SDLT charge. Here they vote a distribution for a certain value and then transfer the asset in settlement of this value.

Although, from one perspective, this is neat and logical, it will not benefit from the SDLT exemption (above). This is because the property transaction would not be "part of a distribution of assets" but rather a transaction for consideration which is equivalent to the distribution that was declared.

Transfer of liability

If a liability is taken over as part of a distribution (perhaps a mortgage) then this liability will be consideration and not part of the distribution to which the exemption applies.

Group relief

All is not necessarily lost if the distribution fails to meet the conditions for SDLT exemption. If the transaction takes place within a 75% group then the recipient company may be able to claim SDLT group relief, meaning SDLT is still not payable. Any claim should be made by using code 12 in the SDLT return.

The potential problem here is that the group relief may not be available if there are arrangements in place for the recipient company to leave the group. Furthermore, the recipient company needs to keep an eye on three-year clawback provisions which can apply if any arrangements are entered into within a three-year period of the group relief transaction.

None of these concerns apply to a distribution in specie which is exempt.

Hamilton Rose's view

As in many areas of tax, the SDLT rules around in specie distributions are more nuanced than many commentators think. Without a full understanding of the framework of the legislation, there are traps that can be fallen into.

The VAT rules on in specie distributions can similarly be misunderstood. A ‘pure’ distribution in specie is treated as a market value supply for VAT purposes, yet a transfer for a negligible amount (£1 say) would be treated as a £1 supply.

Although, perhaps, this is good material for another article, it is also a reminder that there are other taxes apart from SDLT to consider when making in specie distributions…