Changes introduced with effect from 29 June 2016, now make it harder to claim stamp duty relief when a new holding company is inserted above an existing company. Previously, Section 77 of the Finance Act 1986 provided a useful relief in such circumstances.
However, in the future, for the relief to be available, an additional, new condition requires that no disqualifying arrangements exist at the time of the reorganisation. Arrangements are disqualifying if it is a reasonable assumption that the purpose, or one of the purposes, of the arrangements is for a particular person or persons to obtain control of the acquiring company. The share for share exchange itself, including a second share for share exchange (called “relevant merger arrangements” by the legislation), for example where two independent companies are brought together under a new holding company, are excluded from being disqualifying arrangements. However, where the share for share exchange, or any relevant merger arrangements form part of wider arrangements, those other arrangements are disqualifying arrangements. It is worth noting that even under the original legislation, only the first of a series of reorganisations would have attracted relief.
The Revenue has stated that it does not expect the new legislation to apply where there is a reorganisation prior to a future sale (where such sale is unplanned at the time of the reorganisation), or where a reorganisation is prior to an IPO or liquidation. However, if the liquidation is being carried out as part of a liquidation demerger, it is likely that such reorganisation would fall within the new anti avoidance rules.
In addition, the Revenue considers that a “segregational demerger” will be within the scope of the new rules. For example, this would catch an arrangement whereby a company, owned by A and B, carries on two businesses (Business A and Business B). In order to separate the businesses (i) a new holding company is inserted, (ii) Business A is transferred from the existing company to the new holding company, (iii) B’s shares in the new holding company are cancelled (so that A “obtains” control), and (iv) the company (now containing only Business B) is transferred to B. The Revenue considers that it is correct for such arrangements to fall within the scope of the rules (so that Section 77 relief is not available on the insertion of the new holding company), as in their view there is, to some degree, a change of control, notwithstanding that in reality it is simply a partition of the existing business. This analysis would also apply where Business B is carried on in a separate subsidiary.
In applying the “relevant merger arrangements” carve-out from the new rules, the intention is that the existence of a limited number of subscriber shares should not prevent the carve-out from applying.
In practice this change and the new condition to be satisfied will result in additional costs in the context of reorganisations.
If you would like further information about how Clarke Willmott can assist you in understanding the new restrictions on stamp duty relief or for any other tax issues, please contact Niall Murphy in our corporate team.