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

FA 2003, s75A is the main piece of stamp duty land tax (SDLT) anti-avoidance legislation that HMRC has at its disposal to attack certain schemes or arrangements which avoid SDLT.

The issue

HMRC have specifically stated that s75A 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 s75A:

1. Francesca 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. Francesca wants to "de-envelope" the property.
5. If the property is extracted while subject to the £1m of debt then Francesca would be liable to SDLT on chargeable consideration of £1m (due to her taking on the debt of £1m as consideration).
6. Therefore, as an alternative, she 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 s75A thwarts Francesca’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 Francesca.

On this basis, s75A 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 Francesca on this amount.

Hamilton Rose's view

This can seem quite harsh as Francesca’s planning seemed quite neat and would probably fall within the realm of ‘acceptable tax planning’ for other taxes. This highlights how effective s75A can be in overturning SDLT planning when a series of steps is involved.

Furthermore, Francesca 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 s75A issue.

Unfortunately, this point will be of limited use to all those shareholders who are currently seeking to de-envelope companies with external debt.