What is the current practice on stamp duty regarding secondaries transactions?

UK stamp duty applies on any transfer of an interest in a partnership that holds shares. It doesn’t matter if the shares are issued by UK or non-UK companies. Stamp duty is payable on the relevant proportion of the net value of the shares held by the partnership (being the market value of the shares less any loan secured solely on the shares).

However, in practice, stamp duty is not normally paid on the transfer of partnership interests.

In secondaries transactions, the sale agreement and the transfer documents are typically executed and retained outside of the UK and the sale agreement provides for any UK stamp duty cost to be borne by the buyer or split 50:50 between the buyer and the seller (but no stamp duty would actually be paid, except in the unlikely circumstance where the original transfer document is required to be brought into the UK for use in the UK).

Who is the onus on to calculate and pay stamp duty where required?

Stamp duty is not a directly assessed tax. There is currently no legal requirement to submit a transfer for stamping.

Instead the consequence of a document not being duly stamped is that the unstamped document cannot be given in evidence in any court proceedings or be available for any purpose in the UK. The onus to calculate and pay stamp duty would effectively fall on the party which needed to use the original document for any purpose in the UK or to produce it in evidence.

In practice, in the case of a transfer of a partnership interest in a private equity fund, it is unlikely that the sale agreement (or any related transfer documents) would need to be used in the UK for any purpose, so stamp duty is not paid.

How does stamp duty in practice affect buyers and sellers of LP fund stakes?

If the transfer documents are executed outside of the UK and the transfer of the partnership interest does not relate to anything situated or to be done in the UK (for example, the partnership is established outside the UK, none of the parties are in the UK and completion takes place outside the UK), then the transfer should be outside the scope of UK stamp duty.

For buyers and sellers of LP fund interests, this generally means that the sale agreement and related transfer documents have to be executed outside of the UK. In addition, there is likely to be some negotiation in the sale agreement over the circumstances in which the documents can be brought back into the UK and who bears responsibility for payment of any stamp duty.

What are the proposed changes regarding stamp duty and how could they affect secondaries transactions? What’s next in the timeline regarding the consultation?

The UK government has been consulting on changes to the UK stamp duty regime (the consultation ended on 13 October 2020). This follows on from a report published by the Office of Tax Simplification in July 2017 which recommended modernising UK stamp duty, in particular by removing the requirement for the stamping of paper documents and replacing that with a digitised self-assessment process.

One possible outcome of the recent HMRC consultation is that UK stamp duty on transfers of partnership interests could be abolished. This would bring UK stamp duty in line with UK stamp duty reserve tax.

An alternative outcome is that, when stamp duty ceases to be voluntary, the territorial scope of UK stamp duty is narrowed so that it only applies to transfers of interests in partnerships to the extent that the partnership holds UK shares.

If this approach is adopted then offshore execution would no longer be required. UK stamp duty would not apply to transfers relating to partnership interests that do not hold UK shares, wherever the transfer is executed. Narrowing the territorial scope of UK stamp duty to make the place of execution of a document no longer relevant would be a welcome change, especially in times when business travel has become more difficult.

Have you seen issues related to stamp duty affect secondaries transactions? How have parties negotiated such cases? (Could you provide an example?)

We have in the past encountered difficulties dealing with government-backed entities, where there were sensitivities on being seen to structure around stamp duty. The problem is that it is not entirely straightforward for a buyer to calculate, and then pay, the stamp duty. In a typical secondary transaction, neither the seller nor the buyer may have all the information necessary to be able to calculate the stamp duty and it requires the transfer instrument being sent to HM Revenue & Customs to adjudicate.

Could the proposed changes limit the growth of the LP secondaries market?

There may be a significant practical difficulty for secondary transactions if, under a modernised stamp duty regime, UK stamp duty becomes assessable on transfers of partnership interests that hold UK shares.

To calculate the stamp duty, the buyer of the partnership interest would need to know the value of the UK shares held by the partnership. The buyer in a secondary transaction is likely to be acquiring a minority interest in the fund from the seller. The fund may have multiple investments. Moreover, any investments may be held through a series of partnerships (and it would need to be clear whether the modernised stamp duty applied only to directly held shares, or also included interests in UK shares held indirectly).

Consequently, it may be impractical for a buyer in a secondary transaction to determine whether there are UK shares held by the fund and if so, the value of those UK shares. This is especially likely to be the case where the secondary is not GP-led, so that only limited information about the fund’s investments is available.

The uncertainty could impact on the pricing and execution of private equity secondary transactions.

Elliot Weston is head of UK tax and a partner at law firm Hogan Lovells. He has advised extensively on mergers & acquisitions, joint ventures, funds, capital raisings, corporate reorganisations and financing transactions.