In simple terms, de-enveloping a property is when an individual decides to directly own a property rather than own it through a corporate vehicle normally registered in a tax free or low tax jurisdiction.

The use of ‘offshore’ companies to own both residential and commercial properties in the UK started many decades ago due to the then significant tax advantages available to non-domiciled individuals whether they were or were not ordinarily resident in the UK.

However, significant recent changes regarding Capital Gains Tax – see article CGT for non-UK residents on UK property, inheritance tax – see article UK inheritance tax implications of holding UK residential property, and the new ATED charge – see article Annual Tax on Enveloped Dwellings and ATED-related CGT, have made holding UK property in this way much less attractive, and in fact less tax efficient than holding the properties directly.

Usually, SDLT is payable where consideration is given by the shareholders for the transfer of the property. HMRC guidance confirms that where a liquidator distributes a property in specie, SDLT is not payable in the following two instances:

• The company has no debt other than issued share capital, or
• There is debt but this debt is owed solely to the shareholder and the company has no other liabilities other than issued share capital. HMRC do not regard the cancellation of the loan as constituting consideration.

However, if the shareholder assumes an existing third party debt when the company is liquidated, SDLT is payable on the amount of debt assumed.

There may also be a charge if third party debt is repaid before liquidation of the company where the shareholder provides funds to the company to allow it to discharge the debt, although this will depend on the facts of each case.

On liquidation of the company, the company is deemed to dispose of the property for market value. There are three main tax issues to consider:

1. ATED-CGT from 6 April 2013.
2. Non-residents CGT (NRCGT) from 6 April 2015.
3. Attribution of company gains to shareholders under s13 TCGA 1992.

ATED Capital Gains Tax (ATED-CGT)

With effect from 6 April 2013 capital gains tax was extended to certain non-natural persons when they dispose of UK residential property within the scope of the ATED regime. This ATED-CGT charge is levied at a flat rate of 28%, with no indexation allowance.
Where a property was purchased before 6 April 2013 but disposed of after that date, the ATED-CGT charge only applies to the part of the gain which accrued on or after 6 April 2013, or the date from which the property became liable to ATED, if later.
Where a property is not within ATED, for example because it is rented out to an unconnected third party, the gain will not be chargeable to ATED-CGT, although it may still be chargeable under one of the other provisions mentioned above. From 6 April 2015, non-residents (including companies, partners and trustees) are subject to UK capital gains tax on gains arising from the disposal of UK residential property.
Only the portion of the gain arising after 6 April 2015 is chargeable to tax. The rate of CGT is 20% for companies.
ATED-CGT takes priority over the NRCGT charge, so where the property does not qualify for one of the ATED exemptions, the portion of the gain arising after 6 April 2013 will be charged to ATED-CGT, not NRCGT.
In cases where a property owned by a non-resident company qualifies for an ATED relief, no ATED-CGT is payable, and only the gain arising from 6 April 2015 will be charged to NRCGT at a rate of 20%, after indexation relief.

Gains attributed to shareholders under s13 TCGA 1992

This provision allows gains of an overseas company to be apportioned to UK resident participators who own (together with any connected persons) more than a 25% share in the company. Attribution of the gain can also be made to non-resident trustees.

The gain is calculated under corporation tax rules and indexation allowance is available. Capital gains tax is charged on the participator at the standard rates (currently 10%/20%).

Note that a gain can only be taxed under this section to the extent that it is not chargeable to ATED-CGT or NRCGT. Therefore it is possible that where a property is transferred out of a company into personal ownership, two separate calculations may need to be performed:

1. The portion of the gain calculated under ATED-CGT or NRCGT rules as the case may be.
2. The earlier portion of the gain, calculated under normal corporation tax rules, and attributed up to participators under s13 TCGA 1992, and taxed in the hands of the participator at the standard CGT rates of 10%/20%.

The application of s13 is subject to an important motive defence which applies where it is shown that neither the disposal of the asset by the company, nor the acquisition or holding of the asset by the company, formed part of a scheme or arrangements of which the main purpose, or one of the main purposes, was the avoidance of UK CGT or corporation tax.

The taxpayer’s circumstances and reasons for setting up the structure will need to be closely examined to determine whether the motive defence can be invoked.