At 0.5%, stamp duty is by no means the fiercest of taxes, but when applied to a large enough figure it can be significant. A buyer generally accepts that he (she or it) will pay 0.5% stamp duty in respect of a share acquisition. Therefore a £10M acquisition price will give rise to £50,000 of stamp duty. Typically there are stamp duty reliefs in share reorganisations, although 2016 rules made the conditions of these more difficult to meet.
A new company (Newco) issues shares to the existing shareholders of Company A in consideration for its acquisition. The shares in Newco will mirror the shares in Company A and therefore this acquisition will usually be exempt from stamp duty.
If the facts are the same as in Example 1 but there is a plan for control of Newco to change (for example in a partition demerger) then the relief will not be available. Therefore if Company A is worth £10M a dry tax charge of £50,000 will be crystallised.
Historically it has been possible to use ‘swamping’ to avoid a charge in the circumstances of Example 2. This would work by structuring things so that the consideration (subject to stamp duty) was very low. For example if Newco was set up with 1000 1p shares and then only a few shares were used as part of the share for share exchange then consideration subject to stamp duty would be calculated as follows:
£10M x shares exchanged/(1000 + shares exchanged) x 0.5%
This ‘trick’ has finally been stopped by Finance Bill 2020 although the legislation will not come in until Royal Assent. See the following link:
For certain transactions it may be advantageous to complete before 2020 Royal Assent, while swamping is still an option. In many cases some comfort can be taken from other new rules which will reduce stamp duty charges in a demerger when swamping is not used.
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