Getting to grips with the stamp duty changes (Part 1)

In the first of a two-part article, Peter Rayney looks at some of the recent changes to stamp duty affecting owner-managed companies. 

Stamp duty often tends to be overlooked with a simple shrug of the shoulders – ‘It’s only ½% on share purchases, isn’t it?’.  

However, where the transaction values are significant, stamp duty can become a very costly part of many corporate transactions. Advantage should therefore be taken of the many available reliefs, where it is practicable to do so. 

Inserting a new holding company  

Share-for-share exchange transactions are used in a variety of commercially driven cases. For example, the vast majority of capital reduction demergers are preceded by a share-for-share exchange. This is required to insert a new holding company (‘New Holdco’) over an existing trading company (‘Tradeco’) or holding company (‘Old Holdco’) of an existing group structure.  

Under the share exchange, New Holdco would typically acquire 100% of the issued share capital of Tradeco/Old Holdco for a consideration satisfied by an issue of new shares in New Holdco. Capital gains share exchange relief would normally be available for the selling shareholders under TCGA 1992, s 135 (provided TCGA 1992, s 138 clearance is secured).  

Advisers will also be looking to access the stamp duty share exchange exemption under FA 1986, s 77 on New Holdco’s acquisition of shares in Tradeco/Old Holdco. This requires (amongst other things) that the shares issued by New Holdco satisfy the ‘mirror-image’ requirements of FA 1986, s 77 (f)-(h).  

HMRC is notoriously strict in applying these rules. The proportion held by the shareholders of New Holdco in each class of shares immediately after the share-for-share exchange must be the same as that held by them as TradeCo/Holdco shareholders before the share exchange. The relevant classes of shares must also contain the identical rights. Care must also be taken to ensure the relevant shares have the same nominal value or currency denomination. Where section 77 relief is not available, stamp duty will be payable at 0.5% on (generally) the market value of the shares acquired. 

Another hurdle 

Finance Act 2016 added a further condition for the share exchange exemption. This required that no disqualifying arrangements were in place for a change in control of New Holdco (at the time of the share exchange) (FA 1986, s 77 (3)(i)). For these purposes, the CTA 2010, s 1124 definition of ‘control’ applies. In broad terms, this looks at the shareholders’ ability to secure that the affairs of the relevant company are conducted in accordance with their wishes (FA 1986, s 77A). This additional requirement meant that share exchange relief was denied on preparatory share exchanges before a ‘partition-type’ capital reduction demerger. This is because such demergers bring about a split of separate businesses between different shareholders or shareholder groups, and therefore involve a (pre-ordained) change of control in New Holdco.  

Consequently, a further layer of stamp duty was added to these transactions. Representations were made to HMRC on the grounds that this created a ‘double charge’ to stamp duty on partition demergers and was probably an unintended consequence of the change.  

For completeness, it should be mentioned that where a subsequent demerger simply splits the company’s or group’s trades or businesses between the same shareholders through different entities, FA 1986, s 77A should not bite since there would be no change in control within section 77A. 

‘Watered down’ effects 

HMRC took on board the above criticism about the adverse impact of the ‘disqualifying arrangements’ rule on capital reduction demergers. Thus, FA 2020, s 76 ‘watered down’ the effect of FA 1986, s 77A so that the share exchange exemption should now be available in most cases. 

This relaxation is achieved by excluding any 25% shareholder of the ‘original’ Tradeco/Old Holdco when determining whether there is a change in control of the acquiring company. The relevant shareholders must have held their shares for more than three years before the share exchange (FA 1986, s 77A(2)). Since these shareholders are not counted, this means that there would be no change of control, and hence the ‘disqualifying arrangements’ provision is not triggered. 

Example – Disqualifying arrangements and the future ‘change in control’ test 

MP Properties Ltd (MPPL) operates a property investment business, letting out various commercial properties. Its shareholdings have always been as follows:  

The current shareholders have always worked very well together, sharing the same objectives. However, after careful consideration, they have concluded that their respective children may not be able to work together in the same way. Consequently, they decide that it would be best to split the property investment business now so that each part can subsequently be left to the next generation to run and manage on a separate and autonomous basis. 

They decide to implement a capital reduction demerger to split the property business between them. As part of this process, they first insert a new Holdco above MPPL by means of a share exchange, as illustrated below: 

Subsequent steps 

• After a suitable period, MPPL will distribute the part of the business earmarked for DM (together with the relevant properties).  

• New Holdco will then distribute its holding in MPPL to a new company owned by MP (‘MP Newco’) in consideration of new shares issued by that company to MP. This in specie distribution would be made from New Holdco’s share capital (largely created on the share exchange) and MP’s shares in New Holdco would be completely cancelled – see below: 

The demerger of MPPL would give rise to a normal 0.5% stamp duty charge (since MP Newco is providing consideration in the form of a new share issue to MPPL). 

However, going back to the initial share exchange, the FA 1986, 77 stamp duty exemption would only apply if (amongst other things) there are no disqualifying arrangements in place. Before the FA 2020 relaxation, there would have been such arrangements. This is because the future planned steps would involve the cancellation of MP’s shares in New Holdco, thus triggering a change in control in that company; it would become 100% owned by DM. Thus, New Holdco would have been unable to make a competent claim for the section 77 stamp duty exemption. 

However, following the important FA 2020 amendment, the holding of both shareholders can be ignored when determining whether there would be a change of control of New Holdco (they have owned at least 25% of DMPL’s ordinary shares for the last three years). It follows that there is no change in control for the purposes of FA 1986, s 77A, and New Holdco can claim the stamp duty share exemption on its acquisition of MPPL’s shares.  

Practical tip 

During the Covid-19 disruption, applications for the stamp duty exemption should be sent by email to stampdutymailbox@hmrc.gov.uk; e-signatures are accepted. The application must contain sufficient information for HMRC to consider whether the conditions for exemption have been met.