Stamp duty relief for insertions of new holding companies (under s77 FA 1986) is now denied where there is an arrangement for a particular person (or persons) to obtain control of the new holding company. While the relief will probably continue to be available for share-for-share transactions prior to Initial Public Offerings (“IPOs”), it will not be available in circumstances that until the change was announced (June 2016) were thought to be benign.
Section 77 of the Finance Act 1986 (acquisition of target company’s share capital) gives a full exemption from stamp duty where a new holding company is put on top of an existing group. It is an important relief for corporate reconstructions driven by a reasons that include demergers and IPOs.
The relief has always included a ‘motive test’: the transaction must not be part of an arrangement or scheme to avoid stamp duty (or certain other prescribed taxes). This prevents a new offshore company being put on top of a UK company as part of an arrangement to avoid stamp duty.
Government amendments were made to the Finance Bill 2016 at Committee Stage with immediate effect and no consultation to prevent a perceived threat to the revenue base. They make provision for a new condition to be inserted into section 77 and a new section 77A to be inserted into the Finance Act 1986 with effect from 29 June 2016.
Together they restrict the availability of the relief where there are there are arrangements for a particular person (or persons together) to obtain control of the new holding company. Their aim is to ensure that stamp duty is paid on all takeovers of UK companies. They follow a change to the Companies Act 2006 last year that stop a UK company from reducing its share capital as part of a takeover or merger.
The new changes are subject to only one exception – arrangements for a change of control are not disqualifying arrangements in the unusual situation where a new holding company is inserted on top of a group before acquiring all the shares in another company.
In response to concerns expressed by us and others based on a plain reading of the legislation, HMRC are expected to indicate in guidance that the following arrangements will not be treated by them as disqualifying arrangements:
An underwriter’s obligation to take over-allotments of shares in the new holding company on an IPO.
2. Takeovers on IPOs
A numerical or theoretical change of control of the new holding company by subscribers of shares.
The appointment of a liquidator on a members’ voluntary liquidation.
Neither the pre-existing motive test nor the new ‘arrangements’ condition deny the relief (or claw it back) if after the share-for-share exchange there is a takeover of the acquiring company by an unidentified buyer at some, as yet, unascertained point in the future. But they do place emphasis on corporate reconstructions that use the relief for reasons that include a potential exit to be carried out strategically.
If, for example, there is a demerger prior to a sale of part of a trading group to an identified buyer, stamp duty will be chargeable on that demerger if it involves inserting a new company above the company that runs the target business. Some have argued that that is unfair and goes beyond the policy of the new provision. HMRC and the Treasury are not, so far, persuaded. Consequently, those undertaking corporate reconstructions should consider starting them earlier and obtain specialist advice to ensure that the relief is available.
HMRC’s guidance is expected to draw a distinction between capital reduction demergers and liquidation demergers. The relief is expected to be available in connection with liquidation demergers but not capital reduction demergers. The policy (if any) for drawing this distinction is unclear. Nevertheless it may mark a return to liquidation demergers as the preferred route to partitioning businesses.