The stamp duty problem with ‘new holding company buyouts’
18th July 2025
Posted in Articles, Stamp Duty, Stamp Duty Land Tax by Andrew Marr
If certain conditions are met, then a nice tax-efficient way of a shareholder being bought out by a company is through a company purchase of own shares. Here the shareholders will be hoping to get capital gains tax treatment in respect of the share disposal. The various special capital gains tax conditions will often be met when a shareholder is exiting due to retirement or an internal dispute. Here, a key condition is that the buyback is being undertaken for the good of the company’s trade. Sometimes it will not be possible to meet the conditions for special capital treatment and so an alternative route is followed. Reasons for doing this may be because the shareholder has not held the shares for five years – which is another condition for capital treatment – or because the company does not have sufficient distributable reserves to make a purchase of own shares viable. This alternative route usually involves a disposal of shares to a new holding company.
Example
Trotter Trading Ltd is held 75% by Del Trotter and 25% by Rodney Trotter (You know it makes sense!), with £75 of shares originally being subscribed by Del and £25 being subscribed by Rodney. Rodney has gone into a strop, has fallen out with Del and there is a plan to extricate him from the company altogether.
The first plan is for Rodney to be bought out for £10m through a company purchase of own shares. This is on the basis that the company is worth £40m in total. However, Rodney is dismayed to be told that he will be on the hook for income tax to the extent that his proceeds exceed £25, and that the rate of tax will be 39.35% rather than the blended rate of 14% (BADR up to £1m) and 24% (top rate capital gains tax) that he had been hoping for. This is because Rodney has only held the shares for four years.
All is not lost, however, because a new structure is proposed whereby Del and Rodney sell their shares to a new holding company which will give Del shares and Rodney cash or loan notes. The idea here would be for Del to get ‘share-for-share exchange treatment’ – so that he is not taxed and his new shares stand in the shoes of the old shares – and for Rodney to get normal capital gains tax treatment. Various clearances would be required from HMRC to get assurance on this treatment.
The stamp duty problem
The issue with the above proposal is that more stamp duty is payable with the new company structure compared to the initial company purchase of own shares proposal. Under a company purchase of own shares, stamp duty of £50,000 would have been payable (0.5% on the £10m of consideration payable to Rodney). However, the new holding company idea would trigger stamp duty of £200,000. This is because stamp duty would be payable on the full value of Trotter Trading Ltd. There can be a stamp duty relief for share for share exchange transactions, but this is only applicable when there are mirror image shareholdings, which is not applicable here because only Del will be a shareholder of the new company.
Possible solution
We may be able to get to the same commercial position here without triggering all that extra stamp duty. The alternative proposal would work along the following lines:
1. Del sets up a new company (Newco).
2. Rodney sells his shares in Trotter Trading Ltd to Newco for £10m.
3. The shares are then restructured in Trotter Trading Ltd so that the shares held by Newco only have a right to preferential dividends up to £10m. Once this has been paid then the value will have been exhausted.
4. Trotter Trading Ltd pays dividends to Newco to allow Newco to pay Rodney.
5. After £10m of dividends have been paid to Newco, the shares will be worthless and can be cancelled (and Newco struck off).
This gets to the same commercial position as when the holding company is inserted above, but leads to £150,000 less stamp duty.
Forbes Dawson view
Although this possible solution looks slightly contrived, it is all aimed at structuring things in a way to prevent the additional stamp duty charge. The main clearance that Rodney would want is transactions in securities clearance because he would want assurance that HMRC would not seek to subject his payment to income tax rather than capital gains tax. Although they may not grant this, there does not seem to be a logical reason for refusal if they were happy to grant clearance for the holding company route.
Furthermore, for transactions in securities legislation to apply there has to be a tax avoidance motive, but stamp duty is not one of the taxes that is covered. Therefore, it should be legitimate to structure a transaction in a way that avoids stamp duty, and for this to be accepted as a bona fide commercial purpose. We would be interested to hear from anybody who has received such a clearance for this kind of planning!
