STSM053100 - Depositary receipt and clearance services: 1.5 per cent higher rate charge: exempt capital raising transfers and exempt capital raising instruments

With effect from 1 January 2024, no 1.5% charge will arise on exempt capital raising transfers (SDRT) or exempt capital raising instruments (Stamp Duty).

Exempt Capital Raising Transfers

These are defined in section 97AB FA1986, which states that a transfer of chargeable securities is an “exempt capital-raising transfer” if the transfer is in the course of capital-raising arrangements.

“Capital-raising arrangements” are arrangements pursuant to which chargeable securities are issued by a company for the purpose of raising new capital. An issue of chargeable securities is not prevented from being capital raising by the fact that non-cash consideration is provided (for example the consideration is in the form of assets), no consideration is provided (for example where bonus shares are issued) or the consideration is directly received by another party (for example a subsidiary of the issuing company). While not intended to be exhaustive, examples 1 to 4 below are all examples of what HMRC consider to be arrangements pursuant to which chargeable securities may be issued by a company for the purpose of raising new capital.

In order for a transfer to be “in the course of” a capital raising arrangement, HMRC would expect that the transfer was linked to the capital-raising arrangement and was contemporaneous with the issue of securities.

HMRC understands that, in practice, it may take some time for the practical steps to be completed in order to complete the transfer process. HMRC considers that a transfer within 4 months of the relevant issue of securities would be sufficiently contemporaneous.

Transfers made more than 4 months after the relevant issue are unlikely to be sufficiently contemporaneous, but the fact pattern of such cases would need to be considered in order to determine this. An investor may choose not to undertake a transfer in the course of capital-raising arrangements, and, for example, decide to retain their holding in certificated form instead. If they later decide that they wish to transfer their shares to a depositary receipt issuer or clearance service, perhaps because they wish to sell them at that time, then a 1.5% SDRT or Stamp Duty charge may arise on the transfer. This is different to the situation where the investor wants to make a contemporaneous transfer but is prevented from doing so by a restriction (see Restrictions which prevent transfers below).

Example 1

A company (Listco), which is not listed on any stock exchange, undertakes an initial public offering (IPO) on the New York Stock Exchange (NYSE), and issues shares to a clearance service or depositary receipt issuer in connection with this. As part of those same arrangements, shares held by existing Listco shareholders (e.g., founder and institutional shareholders) are transferred to a clearance service or depositary receipt issuer. No 1.5% charge arises on the transfer of the existing shares, as they are exempt capital-raising transfers.

Example 2

A company (Listco), which is not listed on any stock exchange, undertakes an IPO on the New York Stock Exchange (NYSE), and issues shares to a clearance service or depositary receipt issuer in connection with this. As part of those same arrangements, shares held by existing Listco shareholders (e.g., founder and institutional shareholders) are transferred to a clearance service or depositary receipt issuer (whether on sale or otherwise than on sale) as part of the secondary sale component of the IPO. No 1.5% charge arises on the transfers.

Example 3

A company, which has previously undertaken an IPO, undertakes a follow-on offering (FOO), which involves the issue of new shares by the company. Under the FOO arrangements shares held by existing Listco shareholders (e.g., founder and institutional shareholders) are transferred to a clearance service or depositary receipt issuer. Whether made on sale or otherwise than on sale, no 1.5% charge arises on the transfers.

Example 4

A company (Listco), which is not listed on any stock exchange, undertakes an initial public offering (IPO) on the New York Stock Exchange (NYSE), and issues shares to a clearance service or depositary receipt issuer in connection with this. An existing investor chooses not to undertake a transfer in the course of the capital-raising arrangements, preferring to retain their holding in certificated form instead. If they later (more than 4 months after the relevant issue) decide that they wish to transfer their shares to a depositary receipt issuer or clearance service, perhaps because they wish to sell them at that time, then a 1.5% SDRT or Stamp Duty charge may arise on the transfer.

Restrictions which prevent transfers

A transfer of chargeable securities is not prevented from being an exempt capital raising transfer by reason only of a delay in transferring the chargeable securities where:

  • The transferor acquires the chargeable securities (1) before the capital-raising arrangements are entered into, or (2) in the course of capital-raising arrangements.
  • The transferor is subject to a restriction that has the effect of preventing the transfer of the chargeable securities in the course of the capital-raising arrangements, and
  • the transfer is made as soon as reasonably practicable after the time at which the restriction ceases to have effect.

Restriction

The legislation does not define “restriction”. In practice, HMRC considers that this will include legal, contractual, regulatory, practical, and operational restrictions which impact the transferor, such as:

  • Contractual lock-up agreements.
  • U.S. Securities and Exchange Commission (SEC) transfer restrictions.
  • Situations where it may not be practically possible for transfers to take place, for example where a restricted American Depositary Receipt (ADR) facility (see STSM051010) is not available or otherwise able to be utilised by a transferring shareholder and so no transfers take place until it is possible for the transferor to utilise an unrestricted ADR facility.

As soon as reasonably practicable

While the legislation does not define a set period during which any transfers would be made “as soon as reasonably practicable”, HMRC considers that any transfers made within 4 months of the relevant restrictions having ended would be made “as soon as reasonably practicable”.

In some cases, the original restriction which prevented the transfer may end, but further restrictions could then arise. For example:

  • Listco undertakes an IPO on the NYSE. Person A’s (the transferor’s) shares, held in certificated form, are subject to an SEC restriction at the time of the IPO. When the SEC restriction expires, Person A has passed away and the executors of Person A’s estate are unable to transfer the shares as probate has not yet been granted. This prevents the executors from transferring the shares to the depositary or clearance service within 4 months of the original SEC restriction having ended, but they do transfer them promptly once probate is granted. The transfer would be considered to have been made as soon as reasonably practicable.
  • Listco undertakes an IPO on the Nasdaq. Person A’s (the transferor’s) shares, held in certificated form, are subject to a contractual lock up agreement which restricts them from being transferred to the depositary or clearance service. When the lock up period ends, further securities law restrictions now prevent transfers of the shares. When those further restrictions end, the shares are promptly transferred to the depositary or clearance service. The transfer would be considered to have been made as soon as reasonably practicable.

Exempt Capital Raising Instruments

Section 72ZA FA1986 defines an “exempt capital-raising instrument” as being an instrument which transfers relevant securities in the course of capital-raising arrangements. The provisions of section 72ZA FA1986 mirror those of section 97AB FA1986 for exempt capital raising transfers, and the guidance above equally reflects HMRC’s view of how that section should be applied in practice.