tax question

Dividend in SDLT

Tax Question

My client’s company owns a property with one of the shareholders wanting to personally own the property. If it is paid out as a dividend in specie, will SDLT be due?

Tax Answer

There may be occasions where, rather than paying a dividend in cash, it is decided that a distribution of assets should take place.

If there is no obligation to pay a dividend, it is a voluntary distribution and, providing the dividend paperwork prepared correctly, no SDLT liability will arise because there is no chargeable consideration (Paragraph 1 Schedule 3 FA2003). However, there are a couple of things that could alter the position.

Firstly, if the shareholder is taking on debt that is, perhaps, attached to the property being distributed – whether a mortgage, another financial arrangement – the assumption of debt is chargeable consideration (Paragraph 8 Schedule 4 FA2003) and a charge to SDLT would arise on the dividend.

This deemed consideration will also apply if the transfer of the property is treated as a repayment of the shareholders loan account.

Secondly, a charge to SDLT can arise if the wording of the legal documentation relating to the dividend is wrong,

The resolution and board minutes approving the dividend must stipulate that this is a distribution of assets by way of a dividend in specie. If the paperwork contains reference that it is a cash dividend which is to be settled by way of a transfer of assets.

If the documentation is written in the latter way, the cash dividend voted is treated as a debt to the shareholder which is settled on the transfer of the property which then results in the entire asset value being subject to SDLT, again under Para 8 Sch 4 FA2003.

From a company perspective, the transfer of the asset is treated as a capital disposal for corporation tax purposes and tax would be due on any chargeable gain which may arise.

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