When a company acquires another company by way of a share for share exchange, the basic rule is that the acquiring company will be liable for stamp duty based on 0.5% of the value of the shares that it issues (or 0.5% of the value of the shares being acquired in certain circumstances). This will not be the case if a relief under section 77 FA 1986 applies. Broadly this relief will apply if the shares held by the shareholders in the acquiring company after the transaction are ‘mirror image’ to the shares which were previously held in the company that was being acquired. The precise conditions of this relief as it relates to shares are that after the acquisition has been made:
1. The shares in the acquiring company are of the same classes as were the shares in the target company immediately before the acquisition was made.
2. The number of shares of any particular class in the acquiring company bears to all the shares in that company the same proportion, or as nearly as may be the same proportion, as the number of shares of that class in the target company bore to all the shares in that company immediately before the acquisition was made.
3. The proportion of shares of any particular class in the acquiring company held by any particular shareholder is the same, or as nearly as may be the same, as the proportion of shares of that class in the target company held by him immediately before the acquisition was made.
The availability of this relief needs to be agreed by HMRC in an adjudication process.
Miles and his wife Wendy respectively hold 50 £1 A shares and 50 £1 B shares in their trading company. Miles sets up a new company with a single £1 A share and that company acquires the shares in the trading company by issuing Miles with 49 £1 A shares and Wendy with 50 £1 B shares. Subject to various other conditions (including that the transaction must be for bona fide business purposes and no avoidance of tax) the section 77 relief should apply here.
More than one target company
A more difficult question occurs in cases when a company acquires a number of subsidiaries. Some commentators suggest that it is not possible to claim relief in respect of the acquisition of all of the companies. I disagree, although it is then easier to fall into a trap. The best approach is probably to deal with each acquisition serially and carefully check the conditions for each step. This should be relatively straight forward where all the targets have the same share structure, but it will be more complicated where different companies have different classes of share. Often it will be possible to reclassify the shares before any transaction, so as to fall within the relief.
Forbes Dawson view
At the end of the day stamp duty is only payable at 0.5% and so will not be a great concern for lower value companies. In higher value transactions it is worth spending time to assess the viability of section 77. Often it will not be possible, such as when the target companies have fundamentally different shareholder structures. In these cases, the best option will usually be to ensure that the highest value target is acquired first so as to at least secure relief on that part of the transaction.
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