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Stamp Duty on inserting a new Holding Company

Tax Bite – Stamp Duty on inserting a new holding company

This Tax Bite follows on from our Bite of 24 June, covering topical tax issues on demergers. As we explained in that Bite, there is a stamp duty relief, known as section 77 relief, which can apply where a new holding company is placed on top of an existing company / group, which is typically the first step in a demerger or other reconstruction.

Section 77 relief is, since 2016, subject to a “disqualifying arrangements” test (known as section 77A), meaning that the relief won’t be available if there are arrangements for a change of control of the new holding company in existence at the time of the transfer.

Under section 77A, there is no exemption where control is to pass to, for example, spouses or relatives – broadly any change of control suffices for the arrangements test. This means that where a reconstruction is effected with a view to passing control to family members, or indeed where there is to be a partition between shareholders that involves a change of control (e.g. where A and B each own exactly 50% of company X, company X has a subsidiary company Y, and the reconstruction is ultimately intended to pass control of company X to A and company Y to B), the relief is not available.

In response to concerns raised on section 77A, a limited exemption has been introduced in the Finance Act 2020, which received Royal Assent on 22 July. Disappointingly, however, the exemption from section 77A is drawn very narrowly:

• It is only be available where the particular shareholder who obtains control of the new holding company was a 25%+ shareholder in the existing company at all times during the period of 3 years prior to the insertion of the new holding company;

• There is no aggregating of family (or even spouse) shareholdings for this test; and

• Perhaps most surprisingly of all, there is no “look through” for the 3 year test if there have been previous tax-neutral share for share exchanges. So for example if the existing company was itself placed on top of a group in a reconstruction 2 years previously, the periods of ownership can’t be aggregated and the exemption from section 77A won’t be available.

The key points to take away from all of this are:

• Section 77 relief is only relevant where there is an insertion of a new holding company by way of share for share exchange.

• Section 77A generally won’t apply to deny the relief if there is to be a liquidation reconstruction, as nobody obtains control of the new holding company if it is liquidated.

• If the new holding company goes on top as the first step of a reduction of capital demerger, with a view to selling part of the existing group / business to a third party, provided what is sold to the third party is not the new holding company, section 77A shouldn’t apply (i.e. the new holding company won’t undergo a change of control).

• If you have an existing company owned exactly as to 50% by each of shareholders A and B as per our example above, where there is a plan to do a partition, the shareholdings could (if commercially acceptable, and subject to certain other tax considerations such as capital gains tax) be altered so that A had, say 50.1% just before the new holding company was inserted, then if then plan was ultimately for A to have 100% of the new holding company and B to have 100% of the existing company, section 77A would not apply as A would control the new holding company before and after the partition.

You may be familiar with another solution that existed (albeit with some uncertainty over how robust it was) for situations where stamp duty relief was not available, known as “swamping”. This is where a new company is set up with a large amount of share capital, and only a handful of additional shares are issued as consideration for acquiring the existing company, the idea being that the value of the consideration shares (on which stamp duty is paid) is very low as they represent only a small fraction of the total share capital of the new company. However, and again from Royal Assent to the Finance Act 2020 on 22 July, swamping definitely no longer works as the legislation has been changed so that on a share for share exchange involving connected companies, stamp duty is payable on the market value of the shares transferred if higher than the value of the shares issued as consideration.


Posted on 31/01/2022 in Tax News, Stamp Duty, Demergers

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