HMRC SDLT: SDLTM23210 – Reliefs: Group, reconstruction or acquisition relief

Reliefs: Group, Reconstruction or Acquisition Relief

This section of the HMRC internal manual provides guidance on reliefs related to group, reconstruction, or acquisition activities. It outlines the principles and concepts that underpin these reliefs, ensuring compliance with tax regulations.

• Group relief allows companies within the same group to transfer losses.
• Reconstruction relief applies to company reorganisations.
• Acquisition relief is available for certain business acquisitions.
• Eligibility criteria and conditions are specified for each relief type.

Reconstruction and Acquisition Relief: Understanding SDLTM23210

Overview of Reconstruction Relief

Reconstruction relief allows a company to benefit from reductions in Stamp Duty Land Tax (SDLT) when it acquires another company, known as the target company, as part of a planned reconstruction scheme. This type of relief is important for companies engaged in corporate reorganisations.

The acquiring company may enter into a land transaction associated with the acquisition of all or part of the target company, provided certain conditions are met.

Key Conditions for Relief

For reconstruction relief to apply, the following conditions must be satisfied:

• Consideration for Acquisition: The payment made for purchasing the target company’s business must include the issuance of non-redeemable shares in the acquiring company. Non-redeemable shares are those that cannot be redeemed back to the company for cash.
• Shareholder Inclusion: Shares must be issued to all shareholders of the target company. This means every person or entity holding shares in the target company needs to receive some shares in the acquiring company.
• Balance of Consideration: If the consideration involves the issuance of non-redeemable shares and also includes other elements, then all remaining consideration must involve the acquiring company taking on the target company’s liabilities or settling debts.
• Shareholder Proportions: The shareholders from both companies must match in terms of their ownership proportions after the acquisition is completed. This means:
  • All shareholders in the acquiring company must also be shareholders in the target company.
  • The ratio of shares held must be the same in both companies, or very close to being the same.
• Matching Proportions: If both companies cannot match their proportions exactly due to a shortage of shares, reasonable adjustments can be made. However, it is necessary for both companies to maintain the same control after adjustments have been made.
• Bona Fide Commercial Reasons: The acquisition must occur for legitimate business purposes, not as part of a strategy primarily aimed at avoiding tax liabilities. Relevant taxes include stamp duty, SDLT, income tax, corporation tax, or capital gains tax.

Exclusions from Relief

Certain types of companies do not qualify for this relief:

• The target company must have share capital. If the target is a company limited by guarantee without share capital or an unincorporated association, the relief will not be available.

Practical Examples

To better understand how reconstruction relief works, consider the following examples:

Example 1: Successful Acquisition with Share Issuance

Company A wishes to acquire Company B as part of a corporate restructuring plan. As part of the deal:
– Company A agrees to issue non-redeemable shares to the shareholders of Company B.
– The consideration includes both shares issued and the assumption of Company B’s debts.

Assuming all shareholders in Company B are also shareholders in Company A (after the acquisition) and the proportions of their shares in both companies remain the same, Company A can qualify for SDLT relief.

Example 2: Proportions not Exact but Justifiable

Company C acquires Company D. Due to a limited number of shares available in Company C:
– It issues shares to Company D’s shareholders, but the proportions differ slightly.

As long as Company C ensures that the overall control remains constant between both companies and the adjustments made are reasonable, Company C may still be eligible for relief.

Example 3: Disqualified Company Limited by Guarantee

Company E is a charity operating as a company limited by guarantee without share capital. If Company F tries to acquire Company E:
– Since Company E doesn’t have share capital, it cannot benefit from reconstruction relief, regardless of how legitimate the business reasons may be.

Important Considerations

When applying for reconstruction relief, companies should consider the following:

– Ensure proper legal structures and documentation are in place before undertaking any acquisitions.
– Seek advice from professionals who understand the regulations surrounding SDLT and corporate acquisitions.
– Collect and maintain all necessary evidence demonstrating that the acquisition serves genuine commercial purposes.
– Be prepared to justify the proportional holdings of shareholders should HMRC ask for clarification.

Understanding the specifics of reconstruction and acquisition relief, including all necessary conditions and exceptions, is essential for businesses planning to acquire other companies under a scheme for reconstruction. Inappropriate handling of these transactions might lead to unexpected tax liabilities that could negatively affect the companies involved.

Further guidance can also be obtained by referencing additional HMRC resources, specifically on land transactions and group relief provisions, to ensure comprehensive compliance.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM23210 – Reliefs: Group, reconstruction or acquisition relief

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