The HMRC consultation paper explains what is meant by “enveloping” through some examples.
Enveloping of a property occurs when that property is acquired using a “non-natural” person. For example, an individual may set up a company which then purchases a property to hold as the sole asset of the company. The property is then said to be “enveloped” into the company. In the context of the annual charge, a non-natural person is defined as companies and other bodies corporate, collective investment vehicles and partnerships including one or more such entities.
The Government’s concern with regard to enveloping centres on the example set out above whereby an individual establishes a company to envelope a property owned for the personal use of that individual or their family. It is then possible to transfer the ownership of the company (and thereby the economic ownership of the property) without paying SDLT by selling the shares in the company.
The Government recognises that there are a number of reasons, in addition to offering a future SDLT avoidance opportunity, why residential properties are enveloped. For companies this is likely to be the default (and indeed only) option, supporting good business practice and limiting liability. For individuals, this may include: to protect ownership, for inheritance planning, for family reasons, and to comply with laws in foreign jurisdictions.
The Government aims to target the annual charge at those circumstances where tax avoidance may be a significant factor whilst minimising the wider impact for bona fide businesses.