Schemes of reconstruction defined
Schemes of reconstruction defined

The following Tax practice note provides comprehensive and up to date legal information covering:

  • Schemes of reconstruction defined
  • Meaning of scheme of reconstruction
  • First condition: Issue of ordinary share capital
  • Second condition: Equal entitlement to new shares
  • Third condition: Continuity of business
  • Fourth condition: Compromise or arrangement with members

This Practice Note is about the meaning of a scheme of reconstruction for tax purposes.

Tax neutrality is maintained where a company (company A) enters into an arrangement which is a scheme of reconstruction involving the issue of ordinary share capital by a second company (company B) to the holders of ordinary shares (or a class of ordinary shares) in company A in proportion to their holdings.

This is achieved by:

  1. treating the shareholders as exchanging their holdings in company A for the ordinary shares issued by company B

  2. deeming company A and company B to be the same company, and

  3. treating the scheme of reconstruction as a reorganisation of that fictional company's share capital

Where the necessary conditions are satisfied, the overall effect is that the general reorganisation rules apply so that:

  1. the new ordinary shares issued by company B are treated as the same asset, acquired at the same time, as the shareholders' existing holdings in company A, and

  2. the shareholders are treated as making no disposal for the purposes of chargeable gains

In addition, where the scheme of reconstruction involves the transfer of a business, no tax charge is triggered in company A.

Tax neutrality under these provisions requires the relevant transaction to qualify as a 'scheme of reconstruction'.

Tax neutral treatment is also limited to transactions that are carried out for commercial and business

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