STSM042460 | Exemptions and reliefs: reliefs: Section 77A -Disqualifying arrangements

Instruments executed prior to 22 July 2020

For Stamp Duty relief to be available under section 77 (1) Finance Act 1986, the conditions at s.77(3) (i) FA1986 require there to be no disqualifying arrangements in existence at the time the instrument transferring the shares under the share for share exchange is executed. S.77(3) (i) FA1986 applies to any instrument executed on or after 29 June 2016.

S.77A (2) FA1986 defines “disqualifying arrangements”.

Arrangements are “disqualifying arrangements” if it is reasonable to assume that the purpose or one of the purposes of the arrangements is to secure that—

• s.77A (2) (a): a particular person obtains control of the acquiring company, or

• s.77A (2) (b): particular persons together obtain control of that company.

Definitions

• “Control” is to be read in accordance with section 1124 CTA2010.

• “Acquiring company” has the meaning given by section 77 (1) FA1986.

• “Arrangements” includes any agreement, understanding or scheme (whether or not legally enforceable).

The fact that arrangements are conditional, or contingent does not prevent them from being disqualifying arrangements if it is reasonable to assume that the purpose or one of the purposes of the arrangements is for a particular person or particular persons together to obtain control of the acquiring company.

Instruments executed on or after 22 July 2020

The definition of disqualifying arrangements in s.77A FA1986 was amended by FA2020 and applies to any instrument executed on or after 22 July 2020.

These changes mean that a person who has held at least 25% of the issued share capital in the target company at all times during the “relevant period” is excluded when determining whether a disqualifying arrangement is in existence.

This applies both for the purposes of s.77A(2)(a), and s.77A (2)(b), by removing such a person from the scope of those paragraphs.

The “relevant period” is a period of three years ending immediately before the shares in the acquiring company are issued (or first issued) as consideration for the acquisition of the target company.

These changes remove certain transactions involving an arrangement for a change of control of an acquiring company from the scope of s.77A FA1986 where the relevant conditions are met.

Previously, where an acquisition was followed by certain types of demerger which involved a change of control of the acquiring company (see STSM042520 for more information on capital reduction demergers) then s.77 relief would not be available. This could mean that two charges to Stamp Duty arise in certain cases – one on the acquisition and one on the demerger.