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[Memo]

Using a share-for-share exchange

What’s a share-for-share exchange?

In simple terms a share-for-share exchange is where a company exchanges or issues shares in consideration of the exchange or issue of shares from another company. The main benefit is that for tax purposes, if the transaction is structured correctly, shareholders who have exchanged their shares will not be considered to have disposed of their original shares and their shareholding will be treated, for tax purposes, as at the original cost of the shares pre-swap.

Holding company share exchange

Let’s say that the shareholders of an existing trading company (Tradingco) transfer their shares to a newly incorporated holding company (Newco) and in return Newco issues new shares to the shareholders as consideration for their shares in Tradingco. The effect is that a group has now been created with the shareholders now owning the shares in Newco which owns the shares in Tradingco.

Tax implications

The main tax implication for the shareholders of a share-for-share exchange is capital gains tax (CGT). The transfer of shares in Tradingco to Newco is treated as a disposal to a connected party and, therefore, is deemed to take place at market value. However, as the shareholders are receiving shares, and not cash, as consideration for the transfer, relief from CGT is available under s.135 Taxation of Chargeable Gains Act 1992 (TCGA) .

Tip. Where the conditions of s.135 are met, the reorganisation of share capital rules at s.127 will apply such that no disposal of the shares in Tradingco is deemed to have taken place. Instead, the new shares issued in Newco stand in the shoes of the original shares in Tradingco and take over their original base cost.

Tip. For s.135 to be available, the share-for-share exchange cannot be undertaken for tax-avoidance purposes and therefore you should apply for clearance under s.138 to that effect (see The next step ). It would also be prudent to request clearance under the transactions in securities legislation at the same time, under s.701 Income Tax Act 2007 .

Stamp duty

Stamp duty is due on the purchase of shares at a rate of 0.5% of the consideration given for the transfer. Therefore, under a share exchange, stamp duty could be due on the transfer of the shareholders’ shares in Tradingco to Newco.

Tip. If the shareholders of Newco are exactly the same as those in Tradingco and the shares are held in the same proportions, then you can claim a relief from stamp duty under s.77 Finance Act 1986 .

Tip. Stamp duty is only due on the transfer of existing shares; therefore the new issue of shares in Newco to the shareholders is not subject to stamp duty.

Details on the clearance procedure