Section 77A stamp duty restriction may not be as bad as you think
14th February 2025
Posted in Articles, Stamp Duty, Stamp Duty Land Tax by Andrew Marr
Many reorganisations involve one company acquiring another company through a share for share exchange. Without a specific relief, stamp duty would be payable at 0.5% of the value of the consideration which is given. Therefore, if a new company issued shares to acquire a £10m company then it would prima facie have to pay stamp duty of £50,000. This is not generally what happens because of ‘FA 1986 section 77 relief’. Where the shares which are subsequently held by the shareholders are ‘mirror image’ (held in the same classes and same proportions) to the holdings in the original company then relief can be claimed, and no stamp duty is payable.
There used to be a ‘ruse’ used by multinational groups whereby a Jersey holding company (say) was put on the top of a UK holding company before a sale. The Jersey company was then sold, and the buyer did not have an SDLT liability. Because of this ‘section 77A’ was introduced from 29 June 2016 to effectively expand on the conditions required for section 77 to apply. This denies the ‘FA 1986 section 77 relief’ (above) when there are ‘disqualifying arrangements’ in place. Broadly, these arrangements involve there being a plan to change control of the holding company after the share for share exchange. Anecdotally, I believe that advisors are interpreting this legislation too broadly and concluding that it will restrict relief in some cases where there is a good chance that it should still apply.
What does section 77A say precisely?
Arrangements are ‘disqualifying arrangements’ if it is reasonable to assume that the purpose, or one of the purposes, of the arrangements is that ‘a particular person obtains control of the acquiring company’ or ‘particular persons together obtain control of that company’. The word ‘particular’ suggests that we need to know the identity of the acquiror or acquirors. It would follow that it is not simply enough to have a plan for control to pass, but there needs to be a specific person or group of persons who are lined up to take control.
HMRC have stated that a plan for an Initial Public Offering (IPO) should not deny section 77 relief because the identity of the acquirors would not be known. What they actually say is as follows:
This would not be the case in a normal IPO where a wide range of individuals and entities are likely to become shareholders of the plc. Even if the result of an IPO is that the shareholders as a whole obtain control of the acquiring company, it will not normally be reasonable to assume that one of the purposes of the IPO was for specific particular persons to obtain control. A normal IPO is an offer to the public and not only to particular persons.
This clarifies that HMRC also places importance on the word ‘particular’ and it should follow that section 77 relief should be available when there is a plan for control of the acquiring company to change, but the identity of the acquirors is uncertain.
Forbes Dawson view
The availability of section 77 relief should not be dismissed too quickly, even if it is likely that control of the acquiring company will change. This may be relevant in company reconstructions whereby a group is being demerged to pave the way for a sale. If the holding company will simply be put on the market without having any particular buyers in mind, then it is likely that the relief will apply. If heads of terms have already been drawn up with a specific buyer then section 77A will probably prevent relief. It is also worth remembering that a person who has held at least 25% of the target company for three years is able to take control of the acquiring company without blocking the relief. As this relief has to be claimed through an adjudication process, it is worth putting forward any marginal cases to HMRC as part of this process.
