Getting to grips with the stamp duty changes (Part 2): All change!

Peter Rayney continues his review of the recent changes to stamp duty affecting owner-managed companies. 

In the second part of this article, we look at some of the other recent stamp duty changes that may affect owner-managed companies on various corporate transactions. 

Transfer of shares in listed and unlisted companies between connected companies 

As a general rule, stamp duty is only levied on the actual consideration given for the transfer of shares or securities (this would include consideration passing by the assumption of debt). This is based on HMRC’s interpretation of FA 1999, Sch 13 para 2.  

Until the recent legislative changes, the stamp duty legislation did not really have any deemed ‘market value’ rule (in contrast to most other taxes, including stamp duty land tax). In the past, it was, therefore, often possible to reduce stamp duty charges on a number of corporate transactions using the so-called ‘swamping’ technique.  

For example, on a chargeable share exchange (i.e., one that did not qualify for the FA 1986, s 77 exemption), tax advisers were previously able to arrange for the new share or shares issued by the acquiring company to be ‘swamped’ by ensuring that the company already had a substantial amount of issued share capital. This meant that the market value of the consideration shares was very low and often reduced the stamp duty charge considerably. These arrangements were generally accepted by HMRC. 

Unfortunately, this type of planning is rendered ineffective by the deemed ‘market value’ rule introduced by FA 2020 (inserted as FA 2019, s 47A). Since 22 July 2020, stamp duty will be levied on the market value of the (unlisted) shares (provided it exceeds the value of the actual consideration) where the following three conditions are satisfied: 

• Unlisted shares are transferred to a company (‘the transferee company’) for consideration. 
• The transferor is connected with the transferee company. 

• Some or all of the consideration consists of the issue of shares.  

In those (probably rare) cases where the actual consideration exceeds the market value, the stamp duty charge would be based on the higher actual purchase price. 

The ‘connection’ test (in CTA 2010, s 1122) is applied for the deemed ‘market value’ rule, which is very wide. For example, it includes situations where companies are under common control, where someone has control of a company, or where someone has control of a company, and connected parties (such as close family members) have control of another company. 
Importantly, these market value rules can only be triggered where the consideration involves the issue of shares. It does not, therefore, affect shares transferred via an in specie distribution, which would normally not give rise to a stamp duty charge (see below). 

Example: Implementing the FA 2020 stamp duty ‘market value’ rule 

As a result of some earlier buyout transactions, the shareholding structure in part of The Jarrod Group Ltd has become cumbersome. The relevant corporate structure is shown below:  

Cresswell Properties Ltd (CPL) is an (unlisted) property investment company and is currently worth (say) £2 million. Its current issued share capital is as follows: 

 
Mr Jarrod has asked his advisers to tidy up the structure so as to make CPL a wholly owned subsidiary of Kurt Ltd.  

His advisers have indicated that this objective can be best achieved by means of a share-for-share exchange, as shown below: 
 

(a) Capital gains tax treatment 

Assuming a tax clearance under TCGA 1992, s 138 was obtained from HMRC, Mr Jarrod would be treated as having made no capital gains tax (CGT) disposal of his 55% holding in CPL. Mr Jarrod would not, therefore, incur any CGT charge on the sale of his 55 shares in CPL to Kurt Ltd. 

Furthermore, Kurt Ltd would issue new shares (or a new share) to Mr Jarrod as consideration for its acquisition of the 55% holding in CPL. 

(b) Stamp duty issues 

However, the share exchange will not qualify for the stamp duty exemption in FA 1986, s 77. Among the many reasons for this includes the fact that the acquiring company is not acquiring 100% of CPL’s issued share capital, and the current shareholdings in CPL would not ‘mirror’ those in Kurt Ltd immediately after the share exchange. 

Before the FA 2020 changes, Mr Jarrod’s advisers may have recommended a ‘swamping’ arrangement to mitigate stamp duty. This might have been implemented along the following lines:   

However, (and this is very important) following the FA 2020 changes, the above-mentioned planning arrangement does not work because FA 2019, s 47A would apply, since all the relevant three conditions would be met: 

• The shares in CPL are unlisted and are being transferred for a consideration (being the new share issued by Kurt Ltd). 
• Mr Jarrod is connected with Kurt Ltd (the transferee) since he controls it. 

• Some or all the consideration consists of the issue of shares – this being the one consideration share issued by Kurt Ltd 

Therefore, following FA 2020, the stamp duty charge would be based on the market value of the 55 CPL shares transferred by Mr Jarrod to Kurt Ltd. The stamp duty charge would, therefore, now be £1,100,100 x ½% = £5,500.  

Stamp duty group and reconstruction reliefs 

Transfers between fellow group companies may fall within the ‘market value’ rules in FA 2019, s 47A. Nevertheless, if stamp duty group relief is available under FA 1930, s 42, the transfer of the shares would be exempt from duty.  

A stamp duty group relationship applies if one company is parent of the other, or a third company is parent of them both. For these purposes, a parent must beneficially own 75% of the ordinary share capital of the other (additional 75% economic ownership tests must also be satisfied; FA 1930, s 42(2B)). Overseas entities can also be included in a 75% group for stamp duty purposes, provided they have the relevant characteristics as a ‘body corporate’. While there are no stamp duty degrouping charges, reference should always be made to the anti-avoidance rules in FA 1967, s 27 and SP3/98. 

Similarly, the deemed market value rule would not be triggered in qualifying corporate reconstructions, since actual consideration would normally equate to full market value in any case (invariably satisfied by the fresh issue of shares in the acquiring company). 

Distribution of shares in specie 

Properly implemented in specie distributions of unlisted shares should not be affected by the FA 2020 ‘market value’ rules since they do not involve any issue of new shares.  

In such cases, the distributing company must make a distribution of the relevant shares. It must not declare a stipulated monetary amount as a dividend that will then be satisfied by the transfer of the relevant shares. This would involve chargeable consideration and would, therefore, be subject to stamp duty. 

Transfer of listed shares  

Finance Act 2019 introduced an earlier deemed market value rule for listed shares transferred to a connected company (the same CTA 2010, s 1122 definition of connection applies for this purpose – see above).  

This would catch any sale or transfer of listed shares to a connected company (and in contrast to the rule for shares in unlisted companies) irrespective of whether there is any issue of consideration shares. Thus, in appropriate cases, a stamp duty charge would apply to an in specie distribution of listed shares to a connected (company) shareholder.  

Practical tip 

It is worth noting that the deemed market value rules (for either listed or unlisted shares) do not operate unless the transferee is a company. Therefore, gifts or undervalue transfers to ‘connected’ individuals or trusts are not affected by these rules and stamp duty would only arise to the extent that actual consideration is given.