It is quite common for shareholders to insert a holding company on top of an existing company by way of a share for share exchange. Prima facie, when this happens there should be a stamp duty charge based on 0.5% of consideration. This starting position is subject to various reliefs and there have been quite a few changes to the rules over the years.
Section 77 share for share exchange relief
This relief will often apply to exempt a stamp duty charge when the shareholdings are precisely mirror-image. However in 2016 section 77A was introduced to prevent section 77 from working when there were plans in place for control of the holding company to change. This was to combat a practice whereby Jersey holding companies were being placed above multi-billion pound groups prior to a takeover (and there would be no stamp duty on a sale of the Jersey company).
77A would also impact certain demergers where a holding company is inserted with a plan for its control to change.
Restrictions caused by section 77A made swamping attractive. This is where the value of share consideration provided by the holding company is suppressed to reduce stamp duty.
Holding company is set up with 999 £1 shares and then one share is issued to acquire a trading company worth £10m. Here, the single share would be worth £10,000 and stamp duty of £50 would be payable (when swamping worked).
In 2020 swamping was closed down by making stamp duty payable on the market value of the company being acquired. Therefore in the above example stamp duty of £50,000 would have been payable.
However, on a brighter note, the section 77A rules were toned down so s77 relief could still apply to the holding company if the only reason change of control occurs, is as a result of individuals who had held 25% of shares for three years gaining control. This is the position we are in now.
Forbes Dawson view
Although stamp duty is only payable at 0.5%, 0.5% of a large number can still make a transaction less palatable. Because of the ‘25% rule’, where possible, it makes sense to structure demergers so that 25% shareholders end up with the holding company and lower shareholders end up with the demerged entity. Also, shareholders will want to know about any stamp duty bill at the outset!
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