A share for share exchange is a transaction that involves the swapping of shares. An exchange may take place between a shareholder and another company, or between shareholders in the same company or different companies. For tax purposes, it is treated as a ‘reorganisation’ of shares.
Share exchanges are carried out for a variety of reasons, which we discuss below. We also explain the potential benefits, tax consequences, and the procedure involved. This should give you a basic understanding of the topic, but it is essential that you seek professional advice before embarking on any such transaction. This is not something that you should tackle yourself.
What is a share for share exchange?
A share for share exchange typically occurs when shares in one company are exchanged for shares in another company. This type of transaction may also take place when individual shareholders in the same or different companies agree to swap some or all of their shares with one other.
Share exchanges are used in a variety of situations for a number of different reasons, including:
- Facilitating an acquisition
- Splitting an existing company into two or more separate businesses
- Creating a group structure, by transferring divisions within an existing company to one or more subsidiaries
- Merging two or more existing companies to form one single entity
- Creating distributable reserves
- As part of a succession planning strategy
- Rearranging or streamlining the ownership of a company
- Preparing a company for sale
- Resolving shareholder disputes
- Ringfencing business assets to protect them against loss in the event of insolvency
One of the most common examples of share for share exchanges is where a holding company is set up to acquire an existing firm as a subsidiary. The shareholders in the subsidiary exchange their existing shares in that firm for shares in the new holding company.
By doing so, the holding company becomes the owner of the subsidiary, whilst the shareholders maintain their current level of ownership – but their shares are now in the new holding company instead of the subsidiary.
This strategy ensures that the profits the shareholders have built up in the existing trading company are retained in the holding company when it acquires ownership.
The benefits of share exchanges
Share for share exchanges provides an opportunity for shareholders to diversify their portfolios and reduce risk, by spreading their investments across different companies.
Crucially, if structured correctly, a share exchange is treated as a tax-free transaction, meaning that the shareholders are not liable to any Capital Gains Tax charge at the time of ‘disposing’ of their original shares. This can result in significant cost savings, particularly if the shares have increased in value.
- A guide to transferring and issuing company shares
- Rules and restrictions on share transfers in a private limited company
- A guide to company shares
If executed well, these exchanges can also give rise to synergies between firms and facilitate growth, resulting in increased efficiencies, profitability, and share value.
However, not all of these benefits apply to all share for share exchanges. It depends on several factors, including the terms of the transaction, whether advance tax clearance has been obtained, and how well the companies perform after the exchange.
How do you carry out a share for share exchange?
A successful share for share exchange requires careful thought, planning, and expert advice. Depending on the terms of the transaction, there is a risk of significant tax consequences, so it is important to take appropriate tax advice. This will ensure that the exchange is structured properly and all documentation is appropriately drafted.
There are some compliance issues to deal with as well. You will need to:
- Seek a board resolution to propose the share for share exchange to the shareholders
- Consult shareholders and obtain their approval
- Establish the current market value of all shares involved in the exchange
- Discuss the reorganisation plans with any employees who may be affected as a result
- Review the terms of any share options or employee share schemes, to determine whether the share exchange will have any unintended consequences
- Ensure each party completes the necessary stock transfer forms
- Draw up a share for share exchange agreement between the participating parties
- Make the necessary changes to your company’s articles of association and shareholders’ agreement
- Issue new share certificates
- Update the company’s internal register of members and PSC register
- Notify Companies House of the changes
It is also important to obtain advance tax clearance from HMRC. This will ensure that the share for share exchange is treated as a tax-free transaction under the Taxation of Chargeable Gains Act 1992 (section 138A).
Applying for clearance from HMRC
To obtain clearance, you need to apply to HMRC with details of the terms of the exchange, including:
- Which clearance you are applying for
- Details of each principal company that is party to the transaction – e.g. registered name, company registration number, country of incorporation, tax office, Unique Taxpayer Reference (UTR), and a description of trading activities
- Details of any individual shareholders involved in the transaction, including their percentage of ownership
- A diagram that clearly illustrates the relationship between the companies
- The latest set of annual accounts (where applicable) for each company
- Particulars of the proposed exchange
- Commercial justification for the proposed transaction and how it will be of benefit to the companies and/or their shareholders
Your commercial reason for the share for share exchange must be explicitly clear on the application. You will need to satisfy HMRC that there is a bona fide commercial reason for the exchange, and that it will not form part of a scheme or arrangement for the purpose of avoiding tax.
If your application is unclear, or if HMRC is not satisfied with the reason given for the share exchange, the request for tax clearance will be rejected. This will result in tax liabilities on the completion of the exchange.
Requesting advance clearance from HMRC is not mandatory, but it does minimise the risk of unexpected tax liabilities, as well as any unnecessary delays and complications when completing the share for share exchange.
Once received, HMRC will review the application and issue a clearance letter, if the proposed transaction satisfies the requirements.
Sending the advance clearance application to HMRC
You can make an advance clearance application to HMRC by sending an email to [email protected]. To enable HMRC to reply to your request by email, permission must be granted. To do so, you will need to include the following statement:
‘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)….’
If you are making the application (rather than your accountant) on behalf of your company, adapt the wording of the statement as necessary.
If you are unable to use email, you can send your request for advance clearance by post to the Clearance and Counteraction Team at the following address:
BAI Clearance
HMRC
BX9 1JL
Once received, HMRC will review the application and issue a clearance letter, if the proposed share exchange transaction satisfies the requirements.
The conditions for satisfying share for share exchange rules, as well as the procedure in general, can be incredibly complex. Seeking specialist tax advice is essential to avoid costly commercial mistakes and significant tax liabilities.
An experienced accountant or tax specialist will be able to guide you through your options, facilitate a successful share for share exchange, and prepare the necessary paperwork.
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