Companies that operate with sole director ownership models may find it convenient to transfer ownership of company property to the director. However, transfer of ownership of company owned property entails payment of Director’s tax and SDLT (Stamp Duty Land Tax). This could be significant and depends on the income tax rate paid by the director, in addition to the requirement where the company will have to pay Class 1A National Insurance for any work benefits that are extended to employees in any position.
The combination of taxes, stamp duty and Class 1A NI can be stiff, and this can be avoided legally, by an in specie dividend. Here is all that you need to know about this transfer method that can save you a lot in terms of taxes.
Declare a dividend and transfer property to shareholder
Dividend in specie refers to the release of assets other than cash as a dividend. One of the best methods to keep tax exposure low is to declare a dividend and then transfer property instead of cash. This dividend in specie transfer offers multiple benefits to the company and the shareholder. By transferring property to the shareholder, the company dispenses with the need to pay Class 1A National Insurance. If the transfer was by kind or cash, the transfer would have attracted Class 1A National Insurance, which is 13.8% for the year 2018 – 19.
Restrict exposure to tax on dividends only
Dividend in specie transfer will only attract a tax component depending on the tax band that is applicable to the director/shareholder. The three slabs that prevail, attract tax on dividends to the tune of 7.5%, 32.5% or 38.1%. Depending on the tax rate in which the shareholder is taxed, he will have to pay tax on dividends accordingly. This will also have a deduction of the dividend allowance. Effectively this will be the only tax component of the dividend transfer. This makes the dividend in specie transfer a tax efficient exercise, that is legally permissible.
Dispense with the need for SDLT by property transfer
By transferring property to the shareholder/director, the beneficiary will not be expected to pay stamp duty land tax (SDLT) if there is no cash involved in the transfer. That is, if the property has been transferred to the director or shareholder without the need for any payment by the director/shareholder, the beneficiary is not expected to make any kind of stamp duty land tax payment. However, it is important to note that the property should ideally be free from outstanding borrowings. Any outstanding borrowing on the property that is shared as dividend in specie transfer will invite two complications.
- The director/shareholder will be exposed to SDLT if the owed amount is more than the zero rate slab of SDLT which is £125,000.
- Any debt that transfers to the owner of the property will offer benefit in the taxable amount, but not when it is transferred as dividend in specie.
The bottomline is that properties that are transferred as dividend in specie should be free from all debts. This will be the ideal situation to keep tax exposure low and give freedom from all complications.
Need for the right documentation
The whole process needs to stand up to HMRC scrutiny and to achieve this legally, it is necessary to get the paperwork in order. The services of a qualified accountant will help to deal with the documentation that is required. A dividend in specie transfer offers multiple benefits to the beneficiary of the transfer and the company transferring the property. However, the few conditions that are listed above need to be borne in mind – the need for expert documentation and the need to avoid transfer of properties that have debts associated with it. While the effects of debt may be lesser if the outstanding amount is lesser than the zero rate band, it is best to transfer properties that do not have debts.
With the right accountant to advice and help you complete the formalities of the dividend in specie transfer, you can be sure that the while exercise will be hassle free, in addition to being tax efficient. A qualified property accountant & tax adviser will be in a better position to advice you on the finer aspects of the transfer and help you to interpret the clauses in conjunction with other tax laws so as to ensure that your tax exposure is kept to the barest minimum.