Stamp duty changes from 29 June 2016 on share for share exchanges

Fri 15 Jul 2016

On share for share exchanges, stamp duty may be chargeable on the value of the shares issued on the exchange.  However, there is an important relief from this charge at s77 FA 1986 if the following conditions (at s77(3)) are met:

• The transfer of shares must form part of an arrangement by which the acquiring company (Newco) acquires the whole of the issued share capital of the target company (Target) in exchange for the issue of new shares in Newco;
• The shareholders in the acquiring company after the share for share exchange must mirror those in the target company immediately prior to it – so each person who was a shareholder of Target becomes a shareholder in Newco and the shares are of the same class(es) and the same proportions of shares are held by the shareholders;
• The acquisitions is effected for bona fide commercial reasons and does not form part of a scheme or arrangement of which one of the main purposes is tax avoidance.

This is therefore a very important relief from the stamp duty charge of 0.5% where a new holding company is inserted in a group structure by means of a share for share exchange.  The requirement for the shareholdings in the new holding company to mirror those in the target is to limit the relief so that it only applies where there is no change in ownership.

However, new s77A denies the share for share relief if there are ‘disqualifying arrangements’ in place at the time of the share for share exchange for a change of control of the acquiring company.  Arrangements are “disqualifying arrangements” if it is reasonable to assume that the purpose, or one of the purposes, of the arrangements is to secure that:

(a) a particular person obtains control of the acquiring company, or
(b) particular persons together obtain control of that company.

In other words, new s77A is being introduced to frustrate arrangements which attempt to get around the very tightly drawn requirements of s77 for no change in control. The potential scope of the new rules (and in particular, the phrase “particular persons together”) is likely to mean that there will be more cases where a pre-transaction ruling is desirable.

However, share exchanges meeting the conditions for relief under s77(3) FA 1986 which are ‘relevant merger arrangements’ will not be disqualifying arrangements (new s77A(3)).  ‘Relevant merger arrangements’ are arrangements whereby a share for share exchange between Target and Company A, is then followed by a further share for share exchange between Company A and Company B (thus inserting two new holding companies to the group structure). It is understood that the application of these revised rules to IPOs has been raised with HMRC and guidance may become available.

These changes apply to instruments executed on or after 29 June 2016.  It will therefore be important to check that there are no potentially disqualifying arrangements in place at the time of a share for share exchange, and to either caveat advice given on this basis or seek a ruling from HMRC Stamp Taxes.