Share for share exchange in a nutshell
A share for share exchange occurs where a company (company B) acquires the shares in another company (company A) and in exchange issues its own shares to the shareholders of company A. If the necessary conditions are met, the shareholders who have exchanged company A shares for company B shares are treated as if they had not disposed of the old shares. Instead, the shares received in company B inherit the original cost and acquisition date of the shares in company A.
What is a share for share exchange?
The share for share exchange rules apply where a company (company B) acquires the shares in another company (company A) and in exchange issues its own shares to the shareholders of company A. Company B must generally hold, or acquire through the exchange, more than 25% of company A’s ordinary share capital or more than 50% of the voting power in company A.
The rules also apply in principle where the exchange is of debentures (loan notes) of company A, company B or both. Where the debentures of company B are qualifying corporate bonds, however, different rules apply. The gain on the company A shares is frozen until disposal of the debentures. For corporate shareholders, debentures will normally fall within the loan relationships provisions and will therefore be qualifying corporate bonds.
What are the tax consequences of a share for share exchange?
Where the conditions are satisfied, share for share treatment applies to the shareholders who have exchanged their shares, whether they are individuals, personal representatives, trustees or companies. They are treated as if they had not disposed of their shares in company A. Instead, the shares received in company B inherit the original cost and acquisition date of the shares in company A. In effect any gain or loss that would otherwise have arisen is deferred until the shareholder disposes of the shares in company B.
The share for share exchange rules apply automatically and no claim is required.
What are the tax consequences for the acquiring company?
The base cost of the company A shares in the hands of company B is not affected by the share for share exchange rules and is determined on normal capital gains principles. This will depend on whether or not the market value rule for disposals between connected persons applies. If not, the base cost will be what company B gave for the exchange. This will often be specified as an amount of money in the contract for sale and purchase. Where the shareholders in company A are members of the same group of companies as company B the normal no gain/no loss rule does not apply to a share for share exchange so that company B is treated as acquiring the shares at market value.
What if the shareholders receive shares of different classes?
It is not uncommon for different classes of shares to be included in a takeover offer. For example, the offer may include a certain number of ordinary shares and preference shares in company B for each share in company A. This does not affect share for share exchange treatment provided that the conditions are satisfied. It will be necessary to apportion the original base cost of the shareholder’s company A shares between the different classes of company B shares according to their market value.
What if part of the proceeds are in cash?
The consideration for the sale of the company A shares may include cash as well as shares in company B. If so, a gain (or loss) will arise immediately on the cash element but share for share exchange treatment will apply to the shares element. The base cost to be applied to each element is determined using the part disposal rules.
What if a gain on selling the shares would have qualified for business asset disposal relief?
A gain arising on the disposal by an individual or trustees of company A shares may qualify for business asset disposal relief (BADR) if the conditions are met. Where share for share exchange treatment applies, there is no immediate gain and therefore no BADR. Shareholders may, however, prefer to trigger an immediate gain chargeable to CGT to obtain BADR, particularly if a subsequent disposal of company B shares wouldn’t qualify. To enable this, an election can be made to disapply share for share exchange treatment. Such an election must be made no later than the first anniversary of 31 January following the year of disposal.
Are there anti-avoidance rules?
Share for share exchange treatment applies only if the exchange is made for genuine commercial reasons and does not form part of a scheme or arrangements with a main purpose of avoidance of CGT or corporation tax. There is a let out which applies, broadly, where the shareholder in question holds 5% or less of the shares in company B.
Will HMRC provide a clearance that share for share exchange treatment will apply?
The anti-avoidance rule also does not apply if HMRC have given a clearance to that effect before the issue of the company B shares. There is a statutory clearance procedure which includes the right of appeal to the Tribunal if HMRC fail to respond or the applicants are dissatisfied with its decision. A clearance is void if all material facts and considerations are not disclosed.