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Transfer company property to directors

Transfer company property to directors

A trading company has two properties on the balance sheet which are rented out. They were purchased approx 12 years ago and are fully paid for. If the directors wished to transfer the properties to themselves what would be the tax consequnces on them and the company.
Stamp duty?
Transfer of assets at an under value?

Stuart Marsh


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03rd Jun 2004 11:18

Different question...
I think in John's last example the question that then arises is whether the transfer would be a distribution at all. The reference sources I have seem to say that it must be a payment in respect of shares in the company, but I'm not sure I see that. The phrase is in 209(2)(b) as one definition of a distribution, but 209(2)(f) separately includes anything caught by ss4. However, ss4 does talk about transfers to the 'members' and I suppose you could see that as implying to the members qua members, and therefore that if you are making transfers to two directors only one of whom was a member, and where other members did not get a transfer, then it was not being made to them as members.

However, I still don't think this gives the Revenue a *choice*. I can see situations where it could be argued that there is no distribution and that therefore ITEPA applies, but I can't see any way round the plain terms of s 20(2) if it appears that a transaction is both a distribution and emoluments.

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03rd Jun 2004 13:27

...that a transfer of assets does not need to be 'in respect of shares' in order to be within s209(4).

Nor does such a transfer need to be made to all the members.

It just needs to be made to a member - not in his capacity as such or because he is a member(ie not qua member) but just to him ,if he is a member.

Therefore my previous example still stands as an anomoly in need of explanation or justification, as indeed does s20(2) itself. I mean, what is the point of it? why is it there?

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02nd Jun 2004 15:25

The Revenue argument...

...would presumably be that what is being taxed is the transfer of the assets.

That event might meet the definitions of both 'distribution' and 'emolument'. In which case it would seem they would have the choice of taxing the transfer either under Sch E or Sch F.

The prohibition in s20(2) would not apply because what would be taxed under Sch E would be the transfer qua emolument and not the transfer qua distribution - the distribution wouldn't be taxed at all, but only the emoluments.

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02nd Jun 2004 14:33

Distribution can't be charged under ITEPA
S 209(4) simply says that it is a distribution. The charge to tax is under s 20(1) which taxes distributions under Sch F. S 20(2) then says that they can't be taxed under any other provision of the Taxes Acts. So taxation as a distribution has priority - which used to be a disadvantage in the days of investment income surcharge etc, but could now potentially be useful for tax planning... drat that's another one I have to make a return for in August...

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03rd Jun 2004 09:22


...the assets are transfered to two directors in equal shares, one of whom also happens to own one share in the company.

You would think that they should both be taxed in the same way.

But, if s20(2) means what it appears to mean, the director who owns the one share could only be taxed on the transfer as a distribution, with maximum income tax of 25% of the value transfered. This is because s209(4) provides that the transfer is a distribution to him.

In contrast, the director who owns no share could be taxed on emoluments at up to 40% of the same value transfered. There is no question of the transfer being a distribution to him because he is not a shareholder.

The question then is whether and why s20(2) should result in such an anomolous 15% difference in the tax charge on what is essentialy the same income for the two directors?

The second question is, doesn't the principle of the exclusivity of the Schedules (Salisbury Estates) imply that, if the income is assessable under Sch F, then it cannot also be assessed under Sch E?

What, then is the point of s20(2)? If we already know the income can only be taxed as a distribution under Sch F, why do we need s20(2) to tell us so?

As the saying goes, further research is required here. If I get time to do it and find anything useful, I will report back.

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02nd Jun 2004 17:06

Don't see it, John
If it could fall within the definitions of both emoluments and distribution, then to me s 20(2) is specifically saying that it can only be taxed as a distribution. The income is 'a distribution chargeable under Sch F' and therefore cannot be charged under any other Schedule. The Schedules are, in any case, mutually exclusive (Fry v Salisbury House Estate). It's the income that's chargeable, not the 'distribution' or the 'emolument' so the fact that the same income has two potential titles should not give the Revenue any rights.

The only area where I can see doubt is sham. There was a case recently, Forthright (Wales) Ltd, where the company gave its staff shares and paid them dividends that seem essentially to have been compensation for the work they did - that, at least, was what they argued when the Inland Revenue denied them EIS relief. A lot would depend on the precise facts of the case, but I could see a situation where the Inland Revenue might want to claim that the dividends were (in the technical sense of the word) a 'sham' and that the real transaction was payment of emoluments, and therefore Sch F was not in point but ITEPA was. Outside of that, however, s 20(2) seems decisive to me.

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28th May 2004 17:02

Good question John...
...and not one I can claim to know the answer to without doing some research, although the existence of ESC D51 proves that there can be situations in which the legislation potentially gives a double charge to tax.

A quick look through S 209 ICTA doesn't appear to help (it doesn't seem to exclude any amounts otherwise taxable).

Given the choice I suspect the IR will use S 62 ITEPA so if possible would it not be best to remove all uncertainty by first declaring a dividend of the appropriate amount which the shareholders then use to pay MV for the properties? This is of course only possible if the necessary reserves are available. Or, if the company has a very high marginal corporation tax rate, it may be better to declare bonuses of the appropriate amounts. None of this would save tax, but it would remove uncertainty and the possible legal complications identified by other contributors.

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31st May 2004 08:21

Where a company is put into liquidation and there has been a transaction at undervalue between connected parties, the liquidator can (and probably should) overturn the transaction. The directors should consider very carefully the current and future trading prospects of the company. If the transfer of the properties could be shown to have contributed to the financial decline of the company, they may well become personally liable for the debts of the company and subject to disqualification proceedings.

As an alternative, if the directors are also the shareholders of the company and the company has an active property investment/rental business, you could consider a demerger, resulting in the properties being held in one company and the trade being carried on by another company.

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31st May 2004 10:21

Multiple and varied assessments

It seems there are no specific statutory rules that prevent the Revenue from raising multiple and varied assessments on the same source, either under the same or different Schedules.

Apart from a fitting appreciation of and respect for the proprieties of correct Pubic Administration, what prevents them abusing this freedom in practice appears to be s32(1) TMA, which provides that a taxpayer may claim for any assessment that 'appears to be an overcharge' to be vacated.

What remains in place, of course, is the assessment that is not 'an overcharge' - ie the one that charges the most tax.

As a previous respondent has suggested, in the context of the question, the Revenue are more likely to pursue an assessment on the undervalue transfer to the director/shareholders under Schedule E as emoluments, rather than under Schedule F as a distribution, because doing so would raise more tax because the distribution would carry a 10% tax credit whereas the same amount assessed as emoluments would not.

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28th May 2004 16:20


...the Revenue cannot treat it as both emoluments and an income distribution. But what rules this out and what governs the order of precedence?

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28th May 2004 16:15


...on the whole, looking at matters in the round, and taking one thing with another,it could reasonably be argued that this is not a particularly judicious kind of transaction to undertake.

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28th May 2004 13:37


..the suggestion is that the properties should be transferred at serious undervalue, the directors should take legal advice as to whether such action is consistent with their fiduciary duties.

If it can be done legally, they then need to consider that for, CGT, the company will be deemed to have disposed of the properties for market value because the transactions will not be at arm's length, so that s17 TCGA will apply.

Substantial chargeable gains could then arise,and where is the company going to get the cash to pay the tax on those gains?

If the directors are also shareholders, the amount of the undervalue on the transfers might constitute an income distribution for them under s209(4) TA 1988.

Such a distribution is still a qualifying distribution and therefore carries the usual 10% tax credit, but the directors might well be exposed to higher rate income tax.

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28th May 2004 14:55

Money laundering

In case you are wondering, failure to get the paperwork right in relation to company law is not a criminal offence, so money laundering does not come into play (for once!).

If the directors are all happy with what is going on and between them hold all the shares in the company then the possibility of the transaction(s) being declared void by the company may seem remote.

However (1) people can change their minds - even life-long friends (or spouses) fall out, and (2) if there is a change of directors / owners or the company goes into liquidation the company may come under the control of someone new - who might indeed have motive to declare the transaction(s) void.

Of course if the transaction(s) are being planned with some dishonest / fraudulent motive then they could be criminal - which brings us back to money laundering!


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By wdr
28th May 2004 14:23

Look at the "Veltema" judgement for some more comment
I agree fully with the comments made.
Company law:-this is a real point, as without the correct procedures being followed, which include an EGM to approve the transaction, it can be voided at any time by the company. More importantly, the directors will be liable to account to the company for any profit they may makeas they will be under a fiduciary duty to the company. Look at Regal(Hastings) Ltd v Gulliver [1961] 2 AC 134 to see what can happen.

I would add a few further points for consideration.
1]SDLT- specialist advice may well be required here.

2]IHT. A charge under IHTA s.94 will arise if the transfer is not prorata amongst the participators.

3]This is a taxable benefit to the directors, so will require a P11D return[see Veltema] and give rise to a NIC charge

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28th May 2004 11:06

Company law issues

A statement of the obvious I hope, but you need to ensure that you deal correctly with the company law issues that arise.

In particular consider Sections 320 (Substantial property transactions involving directors, etc) and Section 322A (Invalidity of certain transactions involving directors, etc) Companies Act 1985.

These sections should not cause any problems - you just need to make sure you get the paperwork right!


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28th May 2004 16:00

Is it a close company?
If so, it's worth having a look at S 125 TCGA 1992. It can increase the CGT charged on a sale of shares at any time following the distribution of assets at undervalue.

By concession (D51) this is not applied if the relevant transaction(s) has already given rise to a taxable income distribution and/or an employment-related income tax charge, but it's probably best to warn your clients anyway.

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28th May 2004 16:15

Section 62 ITEPA 2003 ?
Would the Revenue not argue that the excess value transferred to the directors is not a distribution but, rather, represnts emoluments chargeable under Section 62 ITEPA 2003 and subject to NICs as well as IT ?

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By Anonymous
02nd Jun 2004 10:14

The easiest method here is to vote the property to
each as a dividend in specie. Saves paperwork and is easy to account for.

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