HMRC SDLT: SDLTM23220 – Reliefs: Group, reconstruction or acquisition relief

Reliefs: Group, Reconstruction or Acquisition Relief

This section of the HMRC internal manual provides guidance on reliefs available for groups, reconstructions, or acquisitions. It outlines the principles and concepts related to tax reliefs in these contexts.

• Explains eligibility criteria for group reliefs.
• Details the process for claiming reconstruction relief.
• Describes acquisition relief and its application.
• Provides examples to illustrate the application of these reliefs.
• Includes references to relevant legislation and case law.

Reconstruction and Acquisition Relief: Understanding the Rules

Overview of Acquisition Relief

When a company (known as the acquiring company) buys all or part of another company (referred to as the target company), this can lead to a land transaction. This transaction may involve the transfer of the target company’s assets.

If all necessary conditions are met, the tax known as stamp duty land tax (SDLT) applies at a rate of 0.5% for the land transaction tied to this acquisition.

Key Conditions for Relief

There are specific conditions that must be satisfied for the acquiring company to benefit from acquisition relief. These conditions include:

• Consideration for Acquisition: The payment or consideration for the acquisition must include non-redeemable shares issued by the acquiring company. Non-redeemable shares are types of shares that cannot be redeemed. These shares should be issued to:
• The target company
• Any shareholders of the target company
• Nature of Consideration: If the payment includes both shares and other forms of consideration, this specific condition applies. The remainder of the consideration apart from the non-redeemable shares must consist of:
• Cash that does not exceed 10% of the nominal value of the non-redeemable shares issued as part of the transaction
• The acquiring company taking on or settling liabilities belonging to the target company
• Both cash and liabilities being taken on or settled
• Association with Other Companies: The acquiring company cannot be linked with any other company involved in agreements with the target company concerning the shares issued as a result of the acquisition.

Implications of Shareholding

The term ‘shareholders’ is included in the rules, which implies that for relief to apply, the target company must possess share capital. If the target company does not have share capital or if shares are being issued directly to the target company, relief cannot be granted.

For example, if the target company is structured as a company limited by guarantee without share capital, or if it operates as an unincorporated association, the relief will not be applicable.

Examples of How Relief Works

To illustrate these principles, consider the following examples:

Example 1: Company A acquires Company B. As part of this acquisition, Company A issues non-redeemable shares to Company B and its shareholders. The total consideration includes the issuance of these shares along with a cash payment that is 6% of the nominal value of the shares. In this case, Company A qualifies for acquisition relief because the conditions are met.

Example 2: Company C buys Company D, which is a company limited by guarantee and has no share capital. In this situation, Company C cannot claim acquisition relief since Company D lacks share capital, thereby failing to meet the necessary requirements.

Example 3: Company E purchases Company F and issues non-redeemable shares to its shareholders. However, Company E has also entered into agreements with another company regarding the issued shares. Company E will not be able to apply for relief under these circumstances due to the association condition not being satisfied.

Key Definitions to Understand

Understanding certain definitions is vital to navigate this process accurately:

• Non-Redeemable Shares: These are shares that do not need to be returned or paid back to the issuing company.
• Consideration: This term refers to what is paid or exchanged in a transaction, including cash, shares, or liabilities.
• Liabilities: These are the financial obligations of a company, such as debts or outstanding payments.

Important Considerations

Before proceeding with an acquisition, the acquiring company should carefully evaluate all aspects of the transaction to ensure that they meet the relief conditions set out by HMRC. Misinterpretations or oversights can lead to additional charges of stamp duty land tax.

Here are some essential points to consider:

• Documentation: Keep thorough documentation of the acquisition process. This is essential for demonstrating compliance with tax laws.
• Financial Structure: Assess the financial structure of the acquisition, ensuring that share issuance and cash payments adhere to the stipulated limits.
• Professional Advice: It is advisable to seek professional legal or tax advice. This can help to navigate any complexities or uncertainties in the process and ensure compliance with tax regulations.

How to Apply for Relief

If the acquiring company believes it qualifies for acquisition relief, it must follow proper procedures to claim it. Here is a simplified process for applying for relief:

1. Prepare Documentation: Collect all relevant documents related to the acquisition. This includes records of the transaction, share issuance, and any cash payments made.

2. Complete SDLT Return: Fill out the Stamp Duty Land Tax return accurately. Make sure to include information about the nature of the transaction, the parties involved, and the financial arrangements.

3. Submit the Return: Send the completed SDLT return to HMRC. Along with the return, submit any necessary documentation that supports the claim for relief.

4. Make Payment: If applicable, handle the payment for any stamp duty land tax owed. If the full conditions for relief are not met, ensure that the correct amount is paid to avoid penalties.

5. Retain Records: Keep a copy of submitted documents and any correspondence with HMRC. This can be useful in case of future inquiries or audits.

By following these steps, the acquiring company can effectively apply for relief and potentially save on significant tax costs associated with the land transaction.

In summary, acquiring relief involves comprehensive rules and guidelines that must be navigated effectively. Careful consideration of the conditions will help to ensure the best possible financial outcome for the acquiring business.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM23220 – Reliefs: Group, reconstruction or acquisition relief

View all HMRC SDLT Guidance Pages Here