eBriefs
Share Exchanges
1st December 2025
A share exchange is when one company (A) issues shares or debentures to a person who is a shareholder of another company (B), in exchange for his shares or debentures in B.
The significance of a share exchange lies in the tax treatment applied to it. Where the share exchange meets the stipulated conditions, the tax legislation will treat it as though no disposal occurred for purposes of Capital Gains Tax (CGT) computation. The basis for this treatment is that:
- the shares in B, which are the “original shares”, are not deemed to be disposed of when they are given up to A; and
- the new issue of shares by A, which are the “new holding”, are deemed to be the same continuing asset as the original shares.
A share exchange is undertaken for various commercial reasons. The most common reasons include the following:
- Takeover
- Creation of a group structure
- Management buyout
- Separation of assets
- Share buyback
How a share exchange is used to give effect to each of the above situations and the CGT implications are briefly explained below.
Takeover
Where a company identifies potential for expansion through the acquisition of another company, it can acquire that other company (the Target) through a takeover by way of a share exchange. It will (as the buyer) issue either new shares or debentures to the shareholders of the Target and in exchange receive the shares they hold in the target, thereby becoming the owner of the Target.
If the stipulated conditions are met, the shareholders of the Target will not be charged to CGT on any gains they make on giving up their shares as they will not be deemed to have made a disposal of their shares in the Target.
Creation of a group structure
A common scenario for this is where members of a family have been conducting and developing business interests through several different companies owned by each member or a group of members of the family. Without a group structure it is not possible for them to benefit from the various tax reliefs given to groups. To create a group structure, a newly formed company or one of the existing companies is inserted above the other companies as a holding company and the holding company will then acquire the shares in the other companies from the respective shareholders – thereby becoming the owner of those other companies – in exchange for which it will issue its own shares.
If the stipulated conditions are met, the shareholders of the Target will not be charged to CGT on any gains they make on giving up their original shares as the new shares they receive in exchange will be deemed to stand in the place of the original shares they gave up.
Management buyout
An example for a share exchange in a management buyout is where the management of a company does not have sufficient funds to buy out a shareholder and must rely on external funding, such as a bank loan, to purchase the shares. In such a situation, a new company will be created, which will acquire all the shares in the existing company (thereby becoming the holding company and making the existing company its subsidiary), and in exchange for the shares acquired, will:
- issue its own shares to the continuing members of the management; and
- using the loan funding obtained on the security of the assets of the subsidiary, pay out cash or issue debentures to the exiting shareholder.
Structured in this manner and provided the conditions are met, the management will not become liable to any CGT on the new shares they are issued in the holding company.
If the exiting shareholder is issued debentures instead of being paid cash, care must be taken to ensure the debentures are not Qualifying Corporate Bonds (QCB’s). Simply, a QCB is a non-convertible security denominated in sterling and issued on normal commercial terms. If conditions are met, the advantage of issuing debentures accrues to both the holding company and the exiting shareholder, to wit:
- there is no immediate charge to tax on the exiting shareholder as the gain he makes on the disposal of his shares are deferred to the date when the debenture is repaid by the company; and
- the company is able to defer payment of the purchase price to the exiting shareholder until the date the debenture is to be redeemed so that there are no immediate cash constraints from having to make payment.
Separation of assets
Where a company carries on more than one business venture, the separation of businesses - also known as a demerger - can be undertaken for various reasons. It could be reasons such as to ringfence that part of the business that is either more profitable or less risky from a less profitable or higher-risk one, to prepare for a potential sale of one part of the business, where there is a falling out between shareholders, separating those parts of the business run by the shareholders in dispute so that the disruptions to the operations or financial or reputational damage is minimised or contained. The separation can be achieved by inserting a new holding company which will carry out a share exchange to acquire the shares of the existing company and a restructuring of the assets of the original company will be done to separate the assets, with the shareholders being able to take ownership of that part of the business they wish to operate.
As long as the conditions are met, no charge to CGT will arise on the share exchange.
Share buyback
A share buyback is a tax-efficient method for a shareholder to exit a company, either for retirement purposes or to pursue other ventures. If properly conducted, the favourable rates of CGT will apply, rather than the higher rates of Income Tax that would normally apply when a shareholder receives a distribution from a company.
The fundamental requirements under company law in relation to a share buyback is that the company must only use distributable profits, and the shares must be paid for on purchase.
Where a company does not have sufficient distributable profits, the buyback can be structured through a share exchange in the same manner as that adopted in a takeover.
Consequently, a holding company is created to acquire the shares of all shareholders in the existing company and in exchange for the shares of that company, the new holding company issues a combination of shares and debentures: the new issue of shares to the remaining shareholders and the debentures to the exiting shareholder.
The benefits accruing to both the shareholder and the company by effecting a share buyback under this method are the same as those cited under the takeover.
Whatever the reasons for conducting a share exchange, there must be an underlying and valid commercial reason for effecting it and it must not be for tax avoidance purposes.
Careful structuring is required to ensure the conditions under the tax legislation and company law are strictly adhered to.
Obtaining advance clearance from HMRC is strongly recommended to ensure no tax issues arise at a later stage.
How we can help
- We can guide and assist you with structuring the share exchange in a legally compliant manner, working with your accountants or tax advisors to ensure the structure meets the required conditions.
- We will obtain advance clearance on your behalf from HMRC for the share exchange.
Tagged in...