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The basic rules for stamp duty apply to companies as they do to other taxpayers. Following the introduction of Stamp Duty Land Tax (SDLT), the scope of Stamp Duty has been narrowed significantly.
For reference Stamp duty land tax (SDLT) is generally payable on the purchase or transfer of interests in land and buildings in England and Northern Ireland where the amount paid is above a certain threshold.
Reliefs in Corporate Transactions
Often in corporate transactions, there are reliefs available for stamp duty where certain conditions are met.
The most commonly encountered reliefs are:
There are also reliefs applicable for transfers to recognised intermediaries, repurchases and stock lending, and transfers to charities.
Relief for transfers between associated companies (group relief)
Group relief is available where the beneficial interest in property (in practice usually stock or marketable securities) is transferred from one body corporate to another and those bodies are associated at the time the instrument is executed.
Association is through one body being the parent of the other, or both having a common parent.
The parent-subsidiary relationship is defined as beneficial ownership of at least 75% of the ordinary share capital and beneficial entitlement to at least 75% of profits and assets available for distribution to equity holders and may be direct or indirect through other companies.
Problems can be encountered where overseas entities or partnerships are included in the group structure. Consideration of this is beyond the scope of this article.
For the purposes of SDLT group relief, a ‘body corporate’ does include an LLP. An LLP can therefore be the parent in a group structure. However, as an LLP does not itself have issued ordinary share capital, it cannot be the subsidiary of other companies. This also means that any subsidiaries of the LLP cannot be grouped with the companies that are the corporate members of the LLP. This does not affect which party can claim group relief, but it does influence which entities form part of a group. An LLP cannot claim group relief itself.
Note that a group relationship can be lost where the parent company is in liquidation. Care also needs to be taken that the transferor company has not ceased to hold beneficial ownership of the stock / marketable securities at the time the instrument is executed (eg where a sale has been exchanged with a third person prior to an intra-group transfer).
Equity holders are defined (with certain modifications and exclusions), as any person who:
However, group relief will be denied if at the time the instrument is executed, arrangements exist by virtue of which at that time or later any person could obtain control of the transferee but not the transferor.
Group relief is also not available if the instrument was executed as part of an arrangement under which:
In contrast with the equivalent SDLT group relief legislation there are no provisions for a subsequent clawback of relief where stock or marketable securities have been transferred intra-group.
In terms of timing, it should also be noted that a parallel charge to stamp duty reserve tax (SDRT) arises on an agreement to transfer UK incorporated shares and a stock transfer form would need to be duly stamped (as exempt from duty where group relief is claimed) within six years of the date of the agreement in order to cancel the SDRT charge arising. This applies equally in respect of the further exemptions described below. There is no equivalent relief under SDRT legislation.
Where, unusually, the stock transfer form has been stamped and duty has been paid, repayment can only be made where a claim is made within two years of the date of the document.
Relief for insertion of new holding company (HoldCo) (Often referred to a s77 Relief)
Relief from stamp duty may be available when:
Strict conditions are in place and the relief must be applied for.
Relief will be restricted where disqualifying arrangements are in existence at the time the instrument for the transfer of a target company’s share capital is executed.
For this purpose, a ‘disqualifying arrangement’ is one which it is reasonable to assume that the purpose, or one of the purposes, is to secure that a particular person(s) obtain control of the acquiring company.
However, it does not include arrangements for the issue of shares in the acquiring company forming part of the consideration for the share-for-share relief or ‘relevant merger arrangements’. It is hoped that these new provisions will ensure that only genuine reconstructions of companies, where there is no real change of ownership of the target company, benefit from the relief.
In addition, for instruments executed on or after 22 July 2020, the meaning of disqualifying arrangements was amended to ensure that section 77 relief can still apply if the person who obtains control of the acquiring company has held at least 25% of the issued share capital of the target company at all times during the period of three years immediately before the time when shares are issued by the acquiring company as consideration for the acquisition of target. The aim of this change is to prevent a stamp duty double charge from arising in respect of partition demergers.
It should be noted that the conditions are considerably more restrictive than those which apply, for example, for the purposes of chargeable gains and HMRC Stamp Taxes apply the conditions stringently.
The conditions are as follows:
From a study of these conditions, it will be apparent that there must be an acquisition of the entire share capital of the target company for bona fide commercial reasons, satisfied only by consideration comprising an issue of shares in the acquiring company, and that the shareholdings in the acquiring company post acquisition must mirror those in the target company pre-acquisition. The inclusion of any other consideration (eg cash) or the failure or inability to exactly mirror the share capital proportions, will mean that the conditions are not met. In particular, care must be taken over subscriber shares in the acquiring company. Immediately prior to the acquisition these shares should be held by one or more of the shareholders of the target company, and the number of consideration shares should be reduced accordingly such that the post-acquisition mirroring is achieved.
HMRC accepts that the requirement for the acquisition to be effected for bona fide commercial reasons and not as part of a tax avoidance arrangement is satisfied where a valid clearance under the capital gains tax code has been obtained for the same transaction.
A common example where mirroring of share capital is not possible occurs where a merger of two companies is effected through the incorporation of a new HoldCo and successive share-for-share exchanges, under which it acquires the share capital of the two existing companies from their respective shareholders. Where the shareholder bases of the two existing companies are different, it will not normally be possible to meet the mirroring conditions on the latter of the two share-for-share exchanges. Given the introduction of the ‘disqualifying arrangements’ condition, great care is also needed in the implementation of the acquisition of the second target company to preserve the section 77 exemption for the acquisition of the first target company.
It should also be noted that HMRC currently takes the view that share capital (the definition of which includes ‘stock’ should be interpreted as including loan stock. This means that (if HMRC is correct) the presence of any loan stock needs to be identified and included, and taken account of in respect of meeting the strict conditions for the relief. This would mean inter alia that any debt instruments such as loan notes or bonds which the target company had issued would also need to be acquired as part of the acquisition and new debt instruments issued by the acquiring company. Although this position is not accepted by most tax professionals, it is currently creating a high degree of uncertainty and care needs to be taken to address this point.
The exemption from stamp duty on the insertion of new HoldCo will be denied where ‘arrangements’ are in place for a particular person or persons together to take control of the HoldCo. This ‘disqualifying arrangements’ condition was introduced by the 2016 Finance Act and applied retrospectively to documents executed on or after 29 June 2016. The change is understood to have been introduced to counter perceived avoidance of stamp duty where a subsequent change of control would not itself lead to a stamp duty cost (for example, a transfer to a non UK registered company followed by a sale).
However, this anti-avoidance rule is much wider in scope and is likely to apply in many circumstances to double up the stamp duty cost where a UK HoldCo is being inserted prior to a sale. The most common scenario is in the context of a demerger of part of a company’s business in advance of a sale of the main business. A ‘relevant merger arrangement’ such as this will not be treated as a disqualifying arrangement provided certain conditions are met. This is to prevent a denial of the section 77 exemption on the first acquisition by a new holding company in a merger where, following acquisition by the new holding company of Target Company A (on which the section 77 exemption is claimed), further shares are issued in the new HoldCo (on an exact proportional basis) to the shareholders of Target Company B.
As noted above, for instruments executed on or after 22 July 2020, the meaning of disqualifying arrangements was amended to ensure that section 77 relief can still apply if the person who obtains control of the acquiring company has held at least 25% of the issued share capital of the target company at all times during the period of three years immediately before the time when shares are issued by the acquiring company as consideration for the acquisition of target. The aim of this change is to prevent a stamp duty double charge from arising in respect of partition demergers.
This relief (which is referred to as ‘Acquisition relief’ in the legislation, but is more commonly known as ‘Reconstruction relief’) provides for no stamp duty to be chargeable where instruments are executed for the purposes of, or in connection with, the transfer of an undertaking pursuant to a scheme of reconstruction. This term is not given a specific statutory definition for these purposes, but case law has established that a transfer of an undertaking, or part of an undertaking, of an existing company to a new company with substantially the same members, carrying on substantially the same business should fall within its ambit.
In practice this relief is now mainly relevant to the transfer of controlling shareholdings in companies on business reconstructions. HMRC in practice accepts that a 75% holding in a company can be regarded to be an ‘undertaking’. Minority shareholdings are unlikely to be accepted as qualifying unless they are part of an investment business. Resistance may also be encountered where a controlling shareholding is transferred but this is less than a 75% interest. In such circumstances, the transferee may need to provide evidence that the holding of the shares involved significant activity / influence on the part of the transferor prior to the transfer, such that it was an identifiable ‘undertaking’.
Again, there is a requirement for consideration to be, or to include, the issue of non-redeemable ordinary shares, but consideration can also include the assumption of debt or discharge of liabilities of the target company.
In common with section 77 relief described in the section above, the acquisition must be effected for bona fide commercial reasons and must not form part of a scheme or arrangement of which the main purpose, or one of the main purposes, is the avoidance of liability to stamp duty, income tax, corporation tax or capital gains tax.
HMRC will generally accept a valid clearance under the capital gains tax code as evidence that this test is satisfied. The shares in the acquiring company must be issued on a basis which results in the proportions of the post-acquisition shareholdings in the acquiring company held by each shareholder matching the proportions held in the target company pre-acquisition.
The relief most often applies where different trades or businesses carried on in separate companies held in a single corporate group are separated and carried on through two or more corporate groups, in each of which the share ownership is the same as that of the original group holding company.
The legislation does not prescribe a deadline within which an application for either group relief or section 77 relief must be made. However, it is good practice to ensure that an adjudication application is made within 30 days of execution of the document. In cases where the stamping takes place more than one year late, a penalty may arise, although in practice this may not be charged given the lack of underlying stamp duty following a valid claim for relief.