Can share cancellation schemes save stamp duty?
11th October 2024
Posted in Articles, Stamp Duty, Stamp Duty Land Tax by Andrew Marr
In its ‘stamp taxes on shares manual’ HMRC has the following to say on ‘cancellation schemes’:
Under this scheme, the Court authorises the company to cancel its share capital and issue new shares to different owners (in the case of a takeover, to the acquiring company, who pays consideration to the target shareholders in the form of cash, loan notes or newly-issued shares in the acquiring company). The new shares are ‘paid up’ from the reserve arising from the cancellation of the old shares. As no existing shares are transferred, there is no charge to stamp duty or SDRT under this type of scheme.
This sounds intriguing because they seem prima facie to be suggesting that we have a ‘HMRC blessed’ mechanism to insert a holding company in a way that does not trigger stamp duty. Often this would not be a concern because we would want to claim stamp duty share-for-share relief (section 77 FA 1986) but sometimes this will not be available. The main reasons that this would not be available would be if shareholdings of the new company and the target company are not a mirror image or if there is an arrangement for control of the new company to change.
Example
There is a reconstruction which involves a new company being inserted over an existing company as a preliminary step. There are two 50% shareholders (A and B) each holding 50 £1 shares and the plan (at the end of a series of demerger transactions) is for A to end up holding the new company and for B to end up holding the existing company (under a second new company). Because of the plan for A to take control we have concluded that the new company will be liable to stamp duty at 0.5% of the value of the existing company if the transaction is undertaken as a traditional share-for-share exchange. Based on a value of £20m this would give rise to a stamp duty liability of £100,000.
A share cancellation scheme can potentially avoid this liability, but great care is required. This would work along the following lines:
1. 90 of the £1 shares in the existing company are reduced pro rata, creating a reserve.
2. There is then a ‘three cornered agreement’ whereby the existing company issues 90 new shares to the new company in exchange for that company issuing shares to the shareholders.
3. The same thing is done with the remaining 10 shares.
This ends up with a holding company owning the existing company (as intended) but there has not been a transfer of shares and so no stamp duty is payable.
Schedule 5AA Scheme of reconstruction
It would be something of a calamity if the shareholders were to lose valuable capital gains tax relief in their pursuit of a stamp duty saving. We need therefore to be 100% sure that the above strategy meets the definition of a scheme of reconstruction. Anecdotally, we have heard that HMRC are satisfied that this is the case but we would advise seeking non-statutory clearances in these circumstances.
Forbes Dawson view
This is an interesting option which is not widely considered in scenarios where stamp duty will arise on the insertion of a holding company. It should probably only be considered when the stamp duty at stake is very high. This is because this structuring could significantly increase advisory costs (and within this is the need to seek confirmation from HMRC that the much more valuable capital gains tax relief will not be disturbed); indeed, many law firms do not have the expertise to deal with it and so assistance may need to be sought from Tax Counsel. In principle there is no reason that this kind of planning could not be used in cases where the stamp duty arises due to the shares in the new company not being mirror-image with the shares in the target company, but again great care should be taken here.
