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With the majority of business owners and advisers focusing on the significant implications of the coronavirus pandemic on businesses, the recent changes to stamp duty rules implemented by Finance Act 2020 might have been overlooked.
Corporate transactions such as management buyouts and demergers can have various tax implications which need to be considered. Any stamp duty implications are often treated as immaterial and not worth worrying about because stamp duty is charged at a relatively low rate of 0.5%.
However, 0.5% on a transaction worth £1 million is £5,000, which is not immaterial. On a transaction that is worth £5 million, the stamp duty charge can be as high as £25,000.
Therefore, it is important that clients are aware of the new rules as they can make corporate transactions more costly.
On a transaction that is worth £5 million, the stamp duty charge can be as high as £25,000
What are the changes?
Finance Act 2020 made two key changes to the stamp duty rules:
These are explained in detail further below.
Extension of market value rule to unlisted shares
Some corporate transactions qualify for capital gains tax, income tax and corporation tax relief but not for stamp duty relief. This has historically been managed by structuring transactions via a technique called “swamping” in order to stop stamp duty arising.
This was historically acceptable to HMRC and was considered uncontroversial. However, HMRC have decided to change some of the rules, meaning that stamp duty will now be payable on some transactions which previously would have been free from a stamp duty charge.
As such, Finance Act 2020 introduced a new market value rule for certain transactions between connected companies. According to these rules, when a company transfers unlisted shares to a connected company in return for an issue of shares, stamp duty will now be based on the market value of the shares transferred.
A similar rule already existed for transfers of listed securities.
It is important to note that the market value rule will apply only where the purchase consideration is wholly or partly an issue of shares by the purchaser.
Therefore, it will not affect transactions such as dividends in specie of shares and is aimed at arrangements which have been used when stamp duty reliefs such as group or acquisition relief have not been available.
Limiting the impact of anti-avoidance rules to partition demergers
When carrying out a partition demerger of a company, the first step often involves the insertion of a holding company via a share-for-share exchange. Section 77 FA 1986 ‘acquisition relief’ applies where the shareholdings and share structure of the acquiring company mirror those of the target company. The application of this relief ensures that there is no stamp duty charge as a result of the share for share exchange.
Since 29 June 2016, an anti-avoidance rule under section 77A FA 1986 has blocked the acquisition relief under section 77 from applying, where at the time of the exchange, there are ‘disqualifying arrangements’. Broadly, this would be the case where it is reasonable to assume that the main or one of the main purposes of the arrangements is to secure that a particular person or persons will obtain control of the holding company.
The steps required for a typical capital reduction demerger are pre-planned before the individual steps are implemented. As a result, section 77A will potentially deny section 77 acquisition relief in respect of the acquisition of the original company’s shares by the new holding company, where the effect of the demerger is to split different trades/businesses between different shareholders, even where they are family members. This can often result in a double charge to stamp duty, first on the share for share exchange and then on the demerger when the trades are trades/businesses are split out unless a certain set of (strict) stamp duty relief rules apply under section 75 FA 1986.
In order to avoid the double ‘hit’ to stamp duty, Finance Act 2020 limits the scope of the section 77A anti avoidance rule such that section 77 acquisition relief should now be available in most cases. In broad terms, section 77 acquisition relief will now be available to the extent that each shareholder held at least a 25% holding in the acquired company throughout the three years before the share exchange.
Where the demerger simply splits the company’s trades or businesses between the same shareholders through different companies, the section 77A antiavoidance rule should not be in point in the first place.