Share Exchanges: A Stamp Duty Problem?

Stamp duty at ½% will normally apply to an acquisition of UK shares. 

However, FA 1986, s 77 provides a valuable stamp duty exemption for qualifying share-for-share exchanges. Typically, the exemption applies to the acquisition of shares in an existing company (‘Target’) by a new company (‘Newco’), which satisfies its purchase consideration entirely in the form of a fresh issue of its shares.

Importantly, the shares subsequently held by the shareholders in Newco must be of the same class and held in the same proportion as the shares they originally held in Target. This is often referred to as the ‘mirror-image’ shareholding condition. The stamp duty exemption is also underpinned by a ‘commercial purpose/no main tax avoidance purpose’ test, which would generally be satisfied by obtaining a competent tax clearance (under TCGA 1992, s 138).

However, from 29 June 2016, FA 1986, s 77A (introduced by FA 2016, s 136) now denies this exemption if ‘disqualifying arrangements’ exist when the share exchange takes place. Broadly, arrangements will be treated as ‘disqualifying’ where it is reasonable to assume that (at least) one of the purposes behind the transaction is to enable a change of control in Newco. 

The ‘control’ definition in CTA 2010, s 1124 applies for these purposes. In broad terms, this looks at the shareholder’s ability to secure that the affairs of the relevant company are conducted in accordance with their wishes. The exercise of control could be secured through the holding of shares, voting power, or powers in the articles/shareholders’ agreement. The case of Irving v Tesco Stores (Holdings) [1982] STC 881 reviewed the application of the identical predecessor provision in ICTA 1988, s 840, which found (by way of obiter) that control of the board of directors would be sufficient.

Company demergers now often take place under the ‘reduction of capital’ provisions of the Companies Act 2006, as these are far more elegant than implementing a corporate reconstruction under the Insolvency Act 1986, s 110. In many situations, the demerger will be driven by a split of the group/business between two shareholders or different shareholder groups.

It is likely that many such demerger arrangements will be affected by the new s 77A. This is because (at the time of the share exchange) arrangements will exist for a subsequent change in the control of the newly inserted holding company. A very simplified example of a typical capital reduction demerger plan is shown below.

 

In the above example, at the time of the share exchange in step 1, the plan for the onward demerger distribution of BOtradeco and consequent change in control of Bakeholdco will be in place. Therefore, (absent any further planning), s 77A will effectively impose a stamp duty charge on Bakeholdco’s acquisition of the shares in BOtradeco. Furthermore, when the shares in BOtradeco are distributed to Paulco (in consideration of an issue of new Paulco shares to Paul), a further stamp duty charge would arise (broadly on the value of the shares issued by Paulco). So, there is an element of ‘double charging’. 

Many feel that the imposition of a new stamp duty charge on genuine ‘capital reduction’ demergers is not consistent with the normal tax-neutral tax treatment for demergers offered within the capital gains and corporation tax rules. There is therefore a call for HMRC to introduce an exemption for legitimate demergers. After all, an exemption is already in place for merger transactions facilitated by a share exchange (see FA 1986, s 77A(3)(b), (4))!

Carefully examine all proposed share exchange transactions to see if there are plans for a subsequent change in the control of the acquiring company.