From a historical perspective, Section 77 Finance Act 1986 has been a key tool regarding relief from Stamp Duty on share for share exchanges. The key conditions are detailed at Section 77(3) and include the following:
- The relevant transfer of shares must form part of a transaction where the acquiring company (Topco) acquires 100% of the issued share capital of the relevant target company (Target) in exchange for the issue of new shares in Topco.
- The shareholders in Topco after the relevant share for share exchange directly reflect those in Target immediately prior to the transaction – i.e. each person who is a shareholder of Target is therefore a shareholder in Topco and the shares are of the same class/proportions.
- The transaction is effected for bona fide commercial reasons and does not form part of a scheme or arrangement where one of the primary purposes relates to tax avoidance.
With effect from 29th June 2016, new legislation now denies this share for share relief if there are “disqualifying arrangements” at issue at the time of the share for share exchange. Section 77A Finance Act 1986 defines disqualifying arrangements as follows:
“If it is reasonable to assume that the purpose/purposes of the transaction is to ensure that a particular person obtains control of the acquiring company or particular persons together/in concert obtain control of that acquiring company”
Consequently this new legislation appears to be a barrier for any transactions which seek to overcome the already factual and purposive test that there is no change in control or tax avoidance. It is also evident that HMRC are seeking to catch corporate re-constructions that entail a strategic exit.
However, it is worth noting that the disqualifying arrangements may not necessarily apply to the following scenarios:
- Where there is a Corporate Reorganisation prior to a future disposal (where such disposal is not planned at the time of the Reorganisation in question).
- Where there is a relevant Reorganisation prior to a liquidation or IPO.
- Where there is a relevant merger arrangement e.g. an arrangement whereby a Corporate Reorganisation detailed above is then followed by a further share for share exchange between Topco and a new holding company (so there are two new holding companies added to the corporate group). However even in this unusual scenario, it is recommended that guidance is sought from HMRC.
These statutory amendments may signal a return (for now) to liquidation demergers when separating a business. However, it is clear that as HMRC continue to intensify their scrutiny of the key area of Section 77 Stamp Duty Relief, professional advice is taken at an early stage at all times. It is also apparent that pre-transaction rulings from HMRC are the best way forward.
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