Many owners of UK residential property presently 'enveloped' or held in a company, either offshore or onshore, are taking steps to 'de-envelope' or transfer their residential property out of the corporate structure.
WHY SHOULD I TRANSFER MY RESIDENTIAL PROPERTY OUT OF A COMPANY?
Recent sweeping tax changes have cast the tax net over companies owning UK residential property, whether they be offshore or onshore companies. The Annual Tax on Enveloped Dwellings (ATED), applies to residential properties above £500,000 since 1 April 2016. ATED related capital gains tax (CGT), and non-resident CGT now applies to sales of residential property by offshore companies as well as individuals, Inheritance Tax (IHT) will apply to offshore companies from 6 April 2017, and higher rates of stamp duty land tax (SDLT) apply to purchases by companies of residential property.
Given that companies are now caught by the changes to IHT and other tax rules, many owners both onshore and offshore will wish to remove the envelope and move into a simpler and cheaper structure, outside the scope of future ATED charges. For many people, there are unlikely to be any tax advantages in keeping or buying residential property in a company which can also incur expensive annual maintenance charges. No doubt many owners of offshore companies will be prompted to rid themselves of them in the light of their increased scrutiny following on from the Panama Papers scandal.
HOW DO I TRANSFER MY PROPERTY OUT OF A COMPANY?
Where the property is owned by the company and there are no debts or liabilities, then there should be no stamp duty land tax payable on the transfer. The usual way of proceeding is to pass a resolution to put the UK or offshore company into voluntary liquidation and carry out a distribution in specie of the property and then transfer into individuals or trustees names.
If the company does have a debt or liability, such as a loan made by the shareholder to the company, the debt can be cancelled and the property transferred to the shareholder.
If however there is a debt due to a third party which is assumed by the shareholder when the property is transferred, then this will give rise to a charge to SDLT. Similarly, if the shareholder provides finance to clear the loan before the transfer of the property, this may also give rise to a charge to SDLT.
HMRC's guidance makes it clear that if any third party debt is repaid before the liquidation of the vehicle holding the property, and the property is transferred to the beneficial owners, section 75A of the Finance Act 2003 may apply so that stamp duty land tax may be chargeable on the amount of the third party debt paid off.
The deed of transfer should be prepared after checking the title to the property and if it is leasehold, any restrictions in the lease. The transfer will usually need to be registered at the Land Registry and any notice of the transfer given to the lessor under the provisions of the lease.
DISTRIBUTION IN SPECIE
It is common for owner-managed companies to transfer properties to their shareholders by way of a distribution in specie (in kind). This will usually exempt from SDLT provided that it is a voluntary transfer for no ‘chargeable consideration’.
Care should be taken to ensure that there is no obligation to pay a dividend in order to avoid a liability to SDLT. The documentation must be prepared carefully. Pitfalls that should be avoided are:-
- If the shareholder takes on a mortgage or debt over the property, the assumption of such mortgage or debt is a chargeable consideration which will result in SDLT being payable.
- The wording of the resolution approving the dividend must be clear. It should provide for a distribution of assets by way of a dividend in specie. It should not say it is a cash value dividend equivalent to the market value of the property to be settled by way of a transfer of assets, to avoid the later transfer of the property being deemed to be in settlement of such cash dividend.
The Company's Articles of Association should be checked to ensure that the Company has the authority to pay a dividend in specie, and the Company should have sufficient distributable reserves for it to declare the distribution in specie.