Read the original guidance here:
HMRC SDLT: SDLTM23260 – Reliefs: Group, reconstruction or acquisition relief

Reconstruction and Acquisition Relief: Withdrawal Explained

Overview of Reconstruction and Acquisition Relief

Reconstruction and acquisition relief is an important provision that allows certain transactions involving company shares and chargeable interests to be exempt from Stamp Duty Land Tax (SDLT). This relief applies when shares in a company are acquired under specific conditions.

Circumstances for Withdrawal of Relief

There are certain situations where this relief can be withdrawn even after it has been initially granted. The withdrawal occurs in the following contexts:

– A chargeable interest (a type of property interest that can incur SDLT) was transferred in a previous transaction.
– This prior transaction was exempt due to the application of share acquisition relief.
– Subsequently, there is a non-exempt transfer that changes the control of the company which received shares in the acquiring firm.

Impact of Control Changes

When it is declared that control over a company has changed, this can lead to the withdrawal of relief already claimed. Here’s how it works:

– If the company that originally held shares in the acquiring company undergoes a change in control after claiming relief, the previously granted relief may no longer apply.
– Consequently, this necessitates a new submission for a land transaction return and payment of any applicable taxes.

Scenarios for Withdrawal

Withdrawal of relief happens if all the following conditions are met:

1. The acquiring company has previously claimed reconstruction or acquisition relief on a specific transaction.
2. That relief remains valid because control of the acquiring company changed due to transactions that were exempt due to share acquisition relief.
3. However, the control of the company that received shares from the acquiring company later changes before the end of a three-year period following the effective date of the original land transaction.
4. This change in control arises from arrangements made before the end of that three-year period.
5. The company still owns the shares (including any derived from those shares) that were part of the original exempt transaction.
6. At the time of the control change, the acquiring company (or a relevant associated company) holds a chargeable interest that:
– Was transferred to them through the original land transaction.
– Is derived from the interest transferred in that transaction.
7. Importantly, the chargeable interest must not have been later acquired at market value through another chargeable land transaction where the relief was applicable but not claimed.

Definitions of Key Terms

To better understand the above conditions, let’s explain some essential terms:

– Chargeable Interest: This refers to any interest in land that is subject to SDLT. It could be ownership of property or a leasehold interest.
– Share Acquisition Relief: This is a relief from SDLT applicable when shares are exchanged in certain company transactions, which typically means that the transfer of related land does not trigger a tax liability.
– Control of a Company: Control usually refers to the power to dictate the decisions of a company, such as ownership of more than 50% of shares.

Further Considerations

In situations where the relief is withdrawn after a change in control, various actions follow:

– A land transaction return must be submitted.
– The appropriate SDLT payment is required based on the new circumstances.

It is essential for companies engaging in these transactions to keep a thorough record of their shareholding and the details of their transactions to ensure compliance with SDLT regulations.

Example Scenario

Let’s consider a practical example to illustrate these principles:

– Company A acquires shares in Company B, claiming reconstruction and acquisition relief because this transfer is exempt under share acquisition relief.
– Initially, everything is compliant, and Company A does not have to pay SDLT on this transfer.
– Over the next two years, Company A undergoes a transfer of control. Company C obtains enough shares to take control of Company B.
– Given that the original Company B (now held by Company C) has had its control altered and is still within that three-year window, the relief initially claimed by Company A could be at risk of withdrawal.

In this scenario, after the change in control, Company A must check if the relief still applies. If it does not, a new transaction return must be filed, and appropriate taxes paid.

Conclusion

Understanding the specific conditions under which reconstruction or acquisition relief can be withdrawn is vital for companies involved in property transactions and share transfers. This ensures they remain compliant with SDLT obligations and can properly manage any potential liabilities arising from changes in company control.