Share for share exchange and advance clearance

Understand when a share for share exchange relief can apply

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A share for share exchange is where one or more shareholders exchange shares they hold in one company for shares in another company. A common example of this is where a new holding company B is put on top of existing company A. Shareholders give their shares in the old company A to company B in exchange for shares in company B.

Where, on a takeover, a company issues shares or debentures in exchange for shares of another company, the ‘selling’ shareholders would not normally have any immediate taxable gain, except in relation to any cash consideration received.

Section 135 TCGA 1992 relief is only available where:

  • acquiring company B either holds or as a consequence of the exchange will hold more than 25% of the ordinary share capital of the target company A
  • acquiring company B makes a general offer to all the shareholders of target company A which would result in it obtaining control; or
  • company B ends up with the greater part of the ‘voting power’ of the target company A.

Technically, a share for share exchange is treated as a ‘reorganisation’ for tax purposes. The selling shareholders are therefore treated as not making a disposal of their old shares but as having acquired their new shares in the acquiring company at the same time and for the same amount as their old shares.

HMRC advance clearance

An advance clearance procedure exists so commercial decisions are not hindered by uncertainty about the possible application of the anti-avoidance provisions.

It is not mandatory for companies to apply for clearance. For practical reasons only the company whose shares or debentures are being acquired or the company making the acquisition can apply for clearance.

For the clearance to be valid the application must be made and dealt with before the new shares or debentures are issued.

The information provided in support of the application must fully and accurately disclose all the relevant facts. If it does not the clearance may be void.

The board has 30 days to deal with the application. If clearance is refused the applicant can ask for the application to be reconsidered by the first-tier tribunal. All referrals to the tribunal are dealt with by the Clearance and Counteraction Team, BAI.

Section 138 clearance applications should be submitted (along with any accompanying clearance applications) in a joint clearance letter and sent to:

HM Revenue & Customs
BAI Clearance
BX9 1JL.

Requesting advance clearance by email

The clearances can be made by sending an email to Attachments should be no larger than 2MB.

Where email submissions are made, HMRC requires the following confirmation to be made in the clearance application:

‘I confirm that our client understands and accepts the risks associated with email and that they are happy for you to send information concerning their business or personal details to us by email. I also confirm that HMRC can send emails to the following address (or addresses)…'

Share for share exchange relief will only apply if the exchange is for bona fide commercial reasons and is not part of a tax-avoidance scheme.