Stamp Duty Land Tax: Group Relief - Paragraph 4ZA of schedule 7 FA 2003
Introduction
1. This article gives practical and technical guidance following the introduction of paragraph 4ZA of Schedule 7 to the FA 2003 in Budget 2008. HM Revenue & Customs (HMRC) will be monitoring this legislation and if necessary, further guidance will be published to assist customers.
2. This article also sets out how HMRC will interpret paragraph 4(4) of schedule 7 to the Finance Act 2003.
3. The guidance provided in this note will apply in normal commercial situations. But where it appears that the guidance is being used for avoidance purposes the circumstances may warrant strict application of the group relief legislation.
Background
4. Paragraph 1 of schedule 7 to FA 2003 provides for relief from stamp duty land tax where land and buildings are transferred between companies, (or other bodies corporate), and, at the effective date of the transaction, the companies are members of the same group. The exemption extends to the grant of leases between group companies.
5. Paragraph 2 of schedule 7 to FA 2003 restricts the availability of group relief if certain events occur. See SDLTM 23030+.
6. Paragraph 3 of schedule 7 provides that relief may be withdrawn if certain events occur within 3 years of the effective date of the transaction. See SDLTM 23070+.
7. Paragraph 4 of schedule 7 provides that certain events will not result in group relief being withdrawn.
8. The first case is where the purchaser ceases to be a member of the same group as the vendor because the vendor leaves the group. This was previously dealt with in the now repealed sub- paragraphs 4(2) and 4(3).
9. The vendor is regarded as leaving the group where the purchaser and vendor cease to be members of the same group by reason of a transaction relating to shares in the vendor or another company that, as a result of the transaction, ceases to be a member of the same group as the purchaser.
10. It was acknowledged by the Economic Secretary to the Treasury when the legislation was introduced that there was scope for avoidance schemes to be constructed using this legislation.
11. HMRC Stamp Taxes was asked to monitor carefully the use of this relief. We have done so and found an increasing number of schemes which are structured so that the vendor leaves the group first, meaning that the subsequent sale of the purchaser will not trigger the withdrawal of the original relief.
12. Paragraph 4ZA has been introduced to counter such schemes, replacing paragraph 4(2) and 4(3) of schedule 7 to FA 2003. This legislation will also apply to those situations where, although no avoidance motive is present, the same sequence of events has occurred.
13. Further information concerning the other circumstances in which group relief will not be withdrawn is available at SDLTM 23080.
Paragraph 4ZA of Schedule 7 FA 2003
14. This provision applies to all group relief claims for transactions where the effective date is on or after 13 March 2008.
15. Sub-paragraph 4ZA (1) of schedule 7 ensures that a vendor can still leave a group without triggering withdrawal of group relief, thus preserving the intention of the original legislation.
16. Sub- paragraph 4ZA (4) however, provides that it will no longer be possible to avoid the withdrawal of group relief where there is a subsequent change in control of the purchaser within three years of the effective date of the group -relieved intra group transfer, or at any time in the pursuance of or in connection with arrangements made before the end of that period.
17. For example, in the group of H (parent), P (purchaser) and V (vendor), V transfers a property intra group to P and group relief is claimed (the qualifying conditions are met). V then leaves the group. Although P is no longer part of the same group as V, group relief is not withdrawn at this stage. This maintains the position pre FA 2008.
18. Two years after the purchase by P, H sells its shares in P to an unconnected third party. This change in control of P will now trigger withdrawal of the original group relief.
19. Withdrawal of group relief will similarly be triggered if there is a change in the control of H as this effectively changes the control of P.
Change in control
20. This section considers certain situations involving a change in control which may lead to a withdrawal of group relief. The guidance sets out HMRC's general approach to these, but should be read in conjunction with the comments at paragraph 3.
Sub-paragraph 4ZA (5) of schedule 7 states that there is a change in control of the purchaser if:
- a person who controls the purchaser (alone or with others) ceases to do so,
- a person obtains control of the purchaser ( alone or with others) or,
- the purchaser is wound up
21. Sub-paragraph 4ZA (8) of schedule 7 provides that any references to control are to be interpreted in accordance with section 416 of the Taxes Act 1988.
This defines control as:
- control over the affairs of the company
- control through voting power
- control through share capital or through issued share capital
- control over income of the company
- control over the assets of the company
22. Further information concerning control is available at CTM60200+
Circumstances where HMRC considers there has not been a change in control
Liquidation
23. The appointment of a liquidator and any subsequent liquidation results in a company losing its beneficial interest in its assets, including any shares it owns in other companies (Ayerst v C&K Construction) Ltd 50 TC651.
24. Without special provision, the commencement of a winding up of a holding company within a group would result in the breaking up of a group. This may present difficulties for groups undertaking genuine reorganisations.
25. To address these concerns HMRC will no longer view the appointment of a liquidator as resulting in a change of control of a company for the purposes of sub- paragraph 4ZA (5) (b), provided that the liquidation can be shown to be part of a scheme of reconstruction which involves a successful claim to reconstruction or group relief or where the economic ownership of the relevant assets remains within the group. Similarly the eventual liquidation of that company will not be regarded as giving rise to a change in control of its subsidiaries (if any) where the transfer of those shares on the liquidation involves a successful claim to relief from stamp duty or where the economic ownership of those shares remains within the group.
New intermediate holding company
26. Sub-paragraph 4ZA (6) provides that a change in control does not arise where a new holding company is inserted either between the original ultimate parent company and its shareholders, or between the purchaser and the parent company with no change in overall economic ownership of the group. This is because HMRC will look at the ultimate shareholding in order to establish whether there has been a change of control.
Loan creditors
27. Sub-paragraph 4ZA (7) provides that, where there is change in control of the purchaser because of a loan creditor, group relief will not be withdrawn if the persons (other than loan creditors) who controlled the purchaser before that change continue to do so. This ensures that difficulties will not arise in relation to the introduction of loan creditors, which may otherwise have impacted on the ability of a group to organise its financing in a commercial manner.
Share Transactions in quoted companies
28. The Economic Secretary to the Treasury made the following comments during a debate in Parliament in response to concerns that HMRC might construe the meaning of change in control so widely that the change in one shareholder in a quoted company might be seen as a change in control.
'Similar concerns were raised in relation to reconstruction relief. I can confirm that we intend to take the same approach that- if control of a publicly owned company changes as a result of an ordinary market transfer of its shares there will be no recovery, because we do not intend to interpret change of control so widely that simple day to day transactions between unconnected minority shareholders in the stock exchange could trigger a claw back' (see Hansard 6 June 2008, column 521)
Partnerships
29. Where the purchaser group's majority shareholder is a partnership a withdrawal of group relief would arise if a partner leaves the partnership or a new partner joins, however small the relevant partnership interest involved. This is due to the wording in section 416 (6) which, coupled with the provisions of s 417(3) (a) ICTA 88, means that each individual partner controls the group in its own right for 416 purposes, since the rights of all partners are attributed to each other .
30. For the purposes of this legislation, however, the rights or powers held by partners will not be attributed. In addition any changes in the general partner will also be disregarded for the purposes of establishing whether there has been a change in control.
Circumstances where HMRC considers there has been a change in control but may not seek to withdraw relief
31. It is recognised that in certain situations strict application of the legislation will result in changes of control which do not reflect an actual change in the economic ownership of the asset. In order to ensure that group relief is not withdrawn in such circumstances a minimum' controlling combinations test will be applied in order to establish whether there has been 'actual' change in ownership of the asset.
Example of minimum controlling combination test
32. If three persons, A, B and C, each hold one third of the shares in a company, and are not connected in any way which would allow the rights and powers of one to be attributed to another, then control is held by A and B, B and C, or A and C but not A, B and C together. This is because for the purposes of the 'minimum' controlling combinations, you disregard combinations containing superfluous members
33. If A leaves then the 'minimum controlling combination' test ensures that a change in control will not be triggered. This reflects the fact that B and C 'control' the company before and after A's departure.
34. If, however, both A and B leave and are replaced by new shareholders D and E then the 'minimum' controlling combination test is no longer satisfied. In this situation a change in control has occurred.
35. Further information regarding minimum controlling combinations is available at CTM60250. The minimum controlling combination test will be applied for SDLT purposes in this matter.
Application of minimum controlling combinations
Share Options
36. It is possible for an option over shares to result in two unrelated parties both being treated as having control of a company. This is because, under section 416(2) ICTA 88, a person is taken to have control of a company if he exercises or is entitled to acquire direct or indirect control over the company's affairs.
37. An option over shares will not be taken into account in determining whether there has been a change in control of the purchaser. HMRC regards the grant or entitlement date to the shares to be the point at which an 'inalienable' right to the shares is triggered. This is the point at which any conditions attaching to share options are considered to be satisfied and it is at this point that a change in control of the purchaser may occur.
38. If the application of a minimum controlling combinations test at this point does not result in a change in control, then group relief will not be withdrawn.
39. However, if a change in control does occur as a result of the granting of the shares then group relief will be withdrawn.
Control established through different tests
40. It is possible for more than one person or one group of persons to 'control' a company. For example, one person may have a greater part of the voting power, while two people hold the greater part of the assets on winding up. All three combinations of people can be taken to have control of the company at the same time.
41. If there was a change in one of these three combinations, then a change in control would be triggered, which could result in relief being withdrawn.
42. In this situation there will not be a withdrawal of relief if one of the minimum controlling combinations established under the tests for control is present following the sale or transfer of shares.
Circumstances in which HMRC considers there has been a change in control
Group takeover
43. Where this is a sale of an entire group and this has occurred within three years of the transaction, a withdrawal of group relief will be triggered as there has been a change in control of the purchasing company.
Paragraph 4(4) of schedule 7 FA 2003
44. Paragraph 4(4) of schedule 7 of Finance Act 2003 provides that group relief is not withdrawn where the purchaser ceases to be a member of the same group as the vendor because of anything done for the purposes of, or in the course of, winding up the vendor or another company that is above the vendor in the group structure.
45. A company is above the vendor in the group structure if the vendor (or another company above the vendor in the group structure) is a 75 per cent subsidiary of the company.
46. This provision has not altered following the introduction of paragraph 4ZA. However, our approach has. A company above the vendor in the group structure can be the purchaser.
47. If paragraph 4(4) applies the provisions of paragraph 4ZA will not normally apply.
Contacts
Customers seeking further guidance on the application of this legislation can apply for a non- statutory business clearance.
A non-statutory clearance is a written confirmation of our view of the application of tax law to a specific transaction or event that you can rely on in most circumstances, as our view of the tax consequences of your transaction.
We will aim to send you our view within 28 calendar days, though in complex cases this may take longer.
Clearances will be provided where you have demonstrated that:
- there is a material uncertainty: and/or
- that the issue is commercially significant.
We will provide non -statutory clearances both
- pre transaction where evidence is supplied that the transaction is genuinely contemplated
- post transaction
Please see 'clearance service for businesses - how to get certainty on significant business tax issues'.
Clearance application requests should be made to:
Any queries about this article should be addressed to:
Yasmin Ali
Policy Adviser
Stamp Taxes
1/38
100 Parliament Street
London
SW1A 2BQ
