Corporate Share Exchange

Corporate Tax | Reorganisations

A group of companies was undertaking a significant reorganisation to create a more efficient holding structure.

The existing structure had multiple shareholders holding shares directly in an operating company, which created complications for investment, dividend policy, and future exit planning.

The proposed solution was to interpose a new holding company above the existing operating company through a share-for-share exchange.

The existing shareholders would exchange their shares in the operating company for shares in the new holding company, which would then own 100% of the operating company.

While this is a common restructuring technique, it required careful attention to ensure that the transaction qualified for the available tax reliefs. Without proper planning, the share exchange could constitute a disposal by the existing shareholders, crystallising significant capital gains tax liabilities.

The key relief is contained in section 135 of TCGA 1992, which provides that a share-for-share exchange is not treated as a disposal if certain conditions are met. The new shares are treated as the same asset as the old shares, acquired at the same time and for the same cost. This allows the reorganisation to proceed on a tax-neutral basis.

However, the relief is subject to anti-avoidance provisions. It is not available if, broadly, the exchange is effected for tax avoidance purposes, and HMRC has the power to counteract arrangements that have tax avoidance as a main purpose.

Given the sums involved, the shareholders wanted certainty before proceeding. We advised the obtaining of advance clearance from HMRC under section 138 of TCGA 1992, which provides a mechanism for taxpayers to obtain confirmation that HMRC will not seek to apply the anti-avoidance provisions.

We prepared the clearance application, which required us to:

• Set out the full details of the proposed transaction, including the identities of the parties, the companies involved, and the commercial rationale.
• Explain the business reasons for the reorganisation, demonstrating that it was driven by genuine commercial considerations rather than tax avoidance.
• Confirm that the conditions for relief under section 135 were satisfied.
• Provide an undertaking that the information provided was complete and accurate.

The clearance application was submitted to HMRC's clearance team, and we managed the subsequent correspondence. HMRC raised some follow-up questions about the commercial rationale, which we addressed in a supplementary submission.

HMRC confirmed that they were satisfied the transaction was not being effected for tax avoidance purposes and that they would not seek to apply the anti-avoidance provisions.

This gave the shareholders the certainty they needed to proceed.

Outcome

HMRC clearance obtained under section 138 TCGA 1992.

Share-for-share exchange completed on a tax-neutral basis, with new holding company structure successfully implemented.

This case study is based on a real client matter. All identifying details have been removed or changed to protect client confidentiality.