Alan Pink explains the new rules imposing market value on transactions in shares for stamp duty purposes, as included in Finance Act 2020.
Stamp duty is in many ways a strange and archaic tax, although a lot of work has been done recently on bringing it more ‘up to date’.
Starting off in the 19th Century as purely a low level tax on documents, the scope of stamp duty has gradually been widened, and the incidence of the tax can now be a significant matter for planners to consider, whereas before it was a minor incidental cost of transactions.
One of the ways in which stamp duty betrays its archaic origins, though, is the lack of any presumption, in the absence of specific rules, that market value will be used as the measure of the taxable transaction, rather than the actual consideration that passes for that transaction. Dare I say it, stamp duty was originally what one could fairly describe as a ‘simple tax’ (a description originally applied to VAT and often ironically quoted since), and on the principle that ‘nature abhors a vacuum’, it has inevitably therefore become a target for officialdom, in the form of HMRC, to bolt various complex new rules onto the basically simple structure.
Company reconstructions
In practice, it is most often in the sphere of major corporate reconstructions and transactions that stamp duty becomes an issue big enough for ‘clever’ planners to turn their attention to reducing the impact of the tax. It seems that much ingenuity has been spent in the corporate departments of large firms of accountants and lawyers (particularly) on attempting to minimise the tax applicable – even though the normal rate of tax of the transfer of shares is ‘only’ 0.5%.
A frequent feature of the sort of transactions we are talking about here is that shares are issued as part of the consideration for the shares in a company being transferred from the ownership of one connected company to another. It seems that certain ‘contrived schemes’ have been developed to minimise the value of the consideration, and hence minimise the stamp duty.
To counter these contrived schemes, legislation was introduced in Finance Act 2019 for transfers of listed securities, which had the effect of sweeping away the old rule that stamp duty was payable on the value of the consideration (whether cash, shares, or both) and substituting a rule that the consideration was deemed to be determined at the market value of the actual shares being transferred themselves, if this was higher than the value of the consideration being given.
So it’s worth pointing out, straight away, the first major limitation in the scope of these new rules: it will not apply, in all probability, to the vast majority of reconstruction schemes where shares are transferred from one company to another. This is because, in my experience at least, most such schemes involve the issue of consideration, which almost by definition will be equal to the market value of the shares being transferred (very often the issue of shares in another company).
A second major limitation to the scope of the new rules is that they will not apply, effectively, where the transferor and the transferee are both companies in the same group. In this case, the normal ‘group relief’ provisions will apply.
Finance Act 2020 changes
What has changed recently is the addition of unlisted securities to the basic rule. Whereas, under the Finance Act 2019 changes, market value was only substituted where the shares being transferred were listed, following Royal Assent to Finance Act 2020 on 22 July 2020, very similar rules now also apply to unlisted securities.
How do the new rules apply?
Market value is substituted, if higher than the value of the consideration, where three criteria are met:
- unlisted ‘securities’ (stock or marketable securities) are transferred to a company for consideration;
- the transferor is connected with the transferee company; and
-
some or all of the consideration consists of the issue of shares.
Implicit in these criteria are a further series of restrictions to the scope of the market value rule.
Where the new rule doesn’t apply
Firstly, the new rule has no application where anyone other than a limited company is the transferee. So shares acquired by an individual (for example), or a partnership or trust, are not within the rules.
Secondly, the new rules only apply where the transfer is for ‘consideration’. For example, a specie dividend of shares would not be caught, unless this is in satisfaction of a pre-existing debt.
The third exclusion is, of course, where the transferee is not within the definition of ‘connected persons’ in CTA 2010, s 1122. Here, perhaps incidentally, is where there is still scope for some planning, to avoid the transferor and the transferee falling within the precise definition of connected persons. A company is connected with another company if:
- the same person has control of both companies,
- a person (‘A’) has control of one company and persons connected with A have control of the other company,
- A has control of one company and A together with persons connected with A have control of the other company, or
-
a group of two or more persons has control of both companies and the groups either consist of the same persons or could be so regarded if (in one or more cases) a member of either group were replaced by a person with whom the member is connected.
Companies are connected with those that control them, and individuals are connected with spouses and ‘relatives’, defined as brothers, sisters, ancestors or lineal descendants.
A fourth restriction in the application of the new rules is where none of the consideration is in the form of shares. This means that one won’t have to substitute market value where the shares are being paid for in cash; or (potentially interestingly) where the transferee company issues or transfers any kind of loan stock in return for the shares it is getting. Again, if the new rules allow room for any kind of ‘loophole’ to enable the continuation of ‘contrived schemes’, this would seem to be an obvious area for planners to look at.
Don’t worry too much
All in all, whilst there is never any scope for complacency in tax planning – because apparently obscure provisions can jump out and ‘bite’ the unwary practitioner or taxpayer – it does seem generally true to conclude that these new rules are something of a minority interest, to put it mildly, and unlikely to provide a real challenge in most real life situations.
The rules will only apply where not only have you got a reasonably complex corporate reconstruction involving the transfer of shares between connected companies but, even more significantly, they will only apply in the very rare situation (absent contrived schemes) where the consideration being given is not the same as the market value of the shares being transferred.
So to take a straightforward example of a reconstruction which involves transferring one company to another, and that other company issuing shares to the transferor in exchange, the shares issued will very often in practice be equal in value to the shares transferred as a natural consequence of what is happening, because the transferee company is attaining a value equal to the value of the shares it is getting; and in these cases, the new rules will have no application.
Practical tip
The new rules are probably something to be docketed away in the back of the average tax practitioner’s memory as a point to look out for in unusual cases; and as far as the average business person is concerned, will be something very much to leave to the expertise of the professional advisers.
