How should an offshore or overseas company make a distribution in specie of UK residential property?

Many owners of residential property no longer wish to retain ownership of UK based  residential property in a company since there are usually no ongoing tax advantages in doing so, and the administrative costs of maintaining such companies can be high.

Generally speaking, distributions of a property are exempt from stamp duty land tax (SDLT) if it is a voluntary transfer and for no chargeable consideration.

De-enveloping or transferring property out of companies into the names of the shareholders or beneficial owners can usually be 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 consideration can be given to 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 registered 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. However, 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 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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