The three significant changes to stamp duty legislation and their implications.
At Budget 2018, the government introduced a market value rule for stamp duty and stamp duty reserve tax (SDRT) for transfers of listed shares to connected companies made on or after 29 October 2018. Since their inception, stamp duty and SDRT have generally only been charged on the actual consideration given (if any) by the buyer or transferee. The 2018 change was made by regulations to prevent forestalling. The Finance (No.3) Bill 2017-19 will, once enacted, give the rule permanent effect.
The government also announced at Budget 2018 that it would consult on extending the new market value rule to transfers of unlisted shares to connected parties other than companies. The consultation, which invites comments on making two other changes to the stamp duty and SDRT rules – the adoption of money or money’s worth as the meaning of chargeable consideration for stamp duty and the alignment of the stamp duty and SDRT treatment of contingent or uncertain consideration, is available here. The deadline for responses is 30 January 2019.
The three proposed changes are significant. Anyone involved in share transfers, either from a corporate or private client perspective, should become familiar with what is proposed. This article covers the proposed changes and speculates on what they might mean.
Other than for transfers of listed shares to connected companies and a clutch of limited exceptions, stamp duty and SDRT are only charged on the value or amount of the consideration given (if any) for the stock or securities transferred. That has been the basis of the stamp duty charge for more than 100 years and the basis of the SDRT charge for more than 30 years. The introduction of a market value charge for connected party transfers would be consistent with acts taken by the government in 2015 and 2016 to ensure that stamp duty and SDRT are payable on corporate takeovers. But it is unclear whether particular transactions drove the decision to introduce a market value charge to prevent an imminent loss of revenue. It was not recommended by the Office of Tax Simplification (OTS) in its 2017 report to ‘reform, digitise and simplify’ stamp duty on paper documents - a copy can be found here here.
Some might say that introducing a market value charge merely means that stamp duty and SDRT will (finally) catch up with other taxes that already have such a charge. It is an anti-avoidance device and necessary to prevent the abuse of the current regime. Others might say that the specific mischief at which the rule is targeted should be made explicit so that the rules are designed narrowly so as to minimise unintended consequences. Unless exceptions are made, as to which see in a moment, certain types of fund transitions and corporate reconstructions will probably be adversely affected. For example, certain types of mergers and demergers, including transfers by operation of law (universal succession), might become chargeable.
The consultation contains a list of transactions for which an exception to the market value rule should be given. The following are conspicuous by their absence:
The legislative change made in 2016 unfairly impacts on partition demergers: see my article in Taxation on 18 January 2018 entitled ‘Reversal of fortune’. That change was not informed by consultation. One hopes that the government will listen to concerns that a market value rule may cause similar unintended consequences.
The other two proposed changes were included in the ‘non-core’ recommendations made by the OTS. It is not clear whether they are the extent to which the OTS recommendations will be taken up or whether they are part of a transition to a radically different stamp duty regime. Time will tell.
The next proposed change is to adopt the concept of ‘money or money’s worth’ as the basis of the charge to stamp duty (where the market value does not bite). Presently, stamp duty is only based on cash, debt and shares. As both the OTS and consultation point out, certain transactions, especially fund transitions, benefit from the more limited stamp duty meaning. If a document is produced that is not ‘stampable’, such as a letter of direction, then the SDRT charge that would otherwise bite on the ‘money or money’s worth’ given would be cancelled. Examples include (but are not limited to):
The proposed alignment of the rules does not appear to be driven by a desire to increase revenue. So, in the absence of a positive policy intention to increase stamp duty revenue on such transactions, the change should be made on a revenue-neutral basis by providing exceptions to transactions that, but for the exceptions, would be affected.
The final proposed change is to the treatment of contingent or uncertain consideration. So far as stamp duty is concerned, this type of consideration is charged if there is a cap or collar or other prima facie sum stated in the share sale agreement. If there is not, the consideration is not charged. There is no provision for the consideration (and the amount of duty paid) to be ‘trued up’ after completion. This can work to the advantage of the taxpayer or HMRC. So far as SDRT is concerned, contingent or uncertain consideration must be valued and the tax applied to the ‘money’s worth’ aspect of the consideration.
The government is proposing to align the treatment of contingent or uncertain consideration – possibly bringing stamp duty into line with SDRT or bringing both regimes into line with stamp duty land tax where there is a true up mechanism.
This will affect share sale agreements that make provision for an ‘earn-out’. The strategy of drafting earn-out clauses in an open-ended form will not be effective in saving stamp duty. It also means that there could be additional stamp duty compliance. The stock transfer form might need to be sent to HMRC for provisional stamping based on an estimate of the total consideration and then returned to HMRC for final stamping once the contingent or uncertain consideration is known.
We would expect the government to publish a summary of the responses to the consultation and the government’s decisions on the final policy design no earlier than the summer of 2019; and for legislation making provision for the changes to be included in the Finance Bill 2020. We will keep you informed of developments.
In the meantime, for more information, please contact Sean Randall.