View the related Tax Guidance about Share for share exchange
Share for share exchange
Share for share exchangeThis guidance note considers the capital gains tax implications where shares are sold in exchange for new shares, including the specific reorganisation rules.Possible types of consideration for share purchasesThe consideration paid by a purchasing company to the shareholder(s) for their shares in a target company could be in the form of either:â˘new shares in the purchasing company in exchange for shares in the target company (a 'share for share exchange')â˘cashâ˘loan notes issued by the purchasing companyâ˘a mixture of the aboveThis guidance note covers the tax implications of consideration in the form of shares or a mixture of shares and cash. For details on the tax implications of consideration in the form of loan notes, see the Loan notes and Qualifying Corporate Bonds (QCBs) and non QCBs guidance note.The timing of the consideration also needs to be considered. Consideration may be paid straight away or it may be deferred. Deferred consideration may be fixed or the amount may be variable. For more information on these, see the Tax treatment of earn-outs and deferred consideration guidance note.Relief from stamp duty (under FA 1986, s 77) is available on a share for share exchange provided certain conditions are met. It should be noted that the relief is not automatic but instead must be claimed. See the Stamp duty â corporate transactions guidance note for further details.Share for share exchangeShareholders who dispose of their shares in exchange for shares in the acquiring company may be eligible
How does SSE interact with other legislation?
How does SSE interact with other legislation?The substantial shareholdings exemption (SSE) is often just one factor to consider in the context of a transaction to sell the shares in a company. As part of the tax structuring for this type of transaction, a number of other tax-related provisions must be analysed to ensure the most tax efficient result is achieved, balanced with any commercial factors. For more in-depth commentary on SSE, see Simonâs Taxes D1.1045, D1.1061. See also the Tax implications of share sale guidance note. For a flowchart showing when SSE is available or when other legislative provisions take priority in particular transactions, see Flowchart â SSE â When does SSE apply with share reorganisations and intra-group asset transfers?.SSE and the degrouping chargeSSE available to exempt de-grouping chargesThe investing company and the target company may have been members of the same group for capital gains purposes, but if the investing company sells its shares in the target company, the group relationship will be broken. Assets may have been transferred between the group companies prior to the group relationship being broken on a no gain / no loss basis. However, if a company leaves the group within six years of an intra-group transfer, whilst still owning the transferred asset, a âdegroupingâ or âexitâ charge would normally arise (see the Degrouping charges guidance note). Similar degrouping rules apply for assets within the intangible regime which are transferred intra-group on a tax neutral basis (see the Degrouping charges and elections â
Entity classification
Entity classificationImplications of entity classificationIf a subsidiary is established, it is important to determine how it will be treated for UK tax purposes as this will determine the basis on which it is taxed. A subsidiary may either be transparent (like a partnership, where the individual partners are taxed rather than the partnership as an entity itself) or opaque (like a company, which is taxed in its own right).If a subsidiary is transparent, then any UK members (who may be shareholders, beneficiaries, partners or something else) will be taxed on profits as they arise, regardless of whether or not they are distributed. It is also the members who must normally claim benefits under a double tax treaty, as the subsidiary itself is not usually entitled to treaty benefits. See the following guidance notes:â˘Tax treatment of partnerships and partnership typesâ˘Foreign trading incomeIf a subsidiary is opaque, then any UK members will not be subject to tax until the profits are distributed. It may then be necessary to determine how this dividend is classified for UK tax purposes (see âClassification of return from a foreign entityâ below). The exception to this is if the controlled foreign company (CFC) or transfer of assets abroad rules apply.See the following guidance notes:â˘Introduction to CFCsâ˘Shareholder issues â international corporate structuresIt may also be necessary to determine if the subsidiary has issued ordinary share capital for UK tax purposes. This will affect:â˘the availability of business asset disposal relief (previously known as
Demerger via liquidation â tax analysis
Demerger via liquidation â tax analysisThis guidance note follows on from the Demerger via a liquidation â overview guidance note which gives an introduction to demergers via liquidations (also known as non-statutory demergers, or section 110 demergers) and includes diagrams to illustrate a typical demerger via liquidation. HMRC clearances will be required if this demerger route is chosen and appropriate time should be built into the transactions process for these. For more information, see the Demerger clearances guidance note.For overall guidance on demergers, including choice of the most appropriate route and planning the demerger project, see the Demergers â overview guidance note.Tax analysis of a liquidation demerger â overviewThere is more than one method for carrying out a liquidation demerger. However, the typical steps for carrying out a liquidation demerger are shown below. Depending on the steps involved, tax charges can be triggered either at the corporate or shareholder level (or both). For a more detailed description of the steps involved in a liquidation demerger, see the Demerger via a liquidation â overview guidance note.A high-level overview of the steps and related tax implications are as follows:StepDescription of stepTax implications â shareholder levelTax implications â corporate levelOneInsert a new holding company (Liquidation HoldCo) above the current holding companyProvided HMRC accepts that the share exchange is driven by commercial reasons (confirmed by a TCGA 1992, s 138 tax clearance), the shareholders will not trigger any capital gain on the
Tax implications of share sale
Tax implications of share saleA business can be sold either by selling the shares in the company that runs it (a share sale) or by that company setting the trade and assets directly (an asset sale). See the Comparison of share sale and trade and asset sale for an overview of the main tax differences in these two sale structures.When a company is disposed of by way of a sale of its shares, its âhistoryâ including its tax history is transferred along with the shares. The due diligence process aims to identify any contingent or hidden tax, commercial or financial liabilities which may potentially fall on the purchaser in the future. In addition to general tax risks, many companies deferred tax bills due to coronavirus (COVID-19), sometimes under bespoke arrangements. If that is the case, careful due diligence will need to be undertaken in order to determine exactly what has been deferred, when it is due and how the cost will be funded. If the tax due diligence uncovers material potential tax risks or liabilities, this may lead to:â˘negotiation of specific warranties or indemnities relating to the potential tax exposure in question in the sale and purchase agreementâ˘a reduction in the price payable for the shares, orâ˘a change to the structure of the deal to work around the potential issueIn a worst-case scenario where the potential tax liability is very large in the context of the transaction in question and outweighs the commercial benefits, the deal
Company tax planning
Company tax planningIn addition to considering the tax issues for shareholder, it may be necessary to do some planning for the business to be floated, including:â˘ensuring that all assets necessary to the running of the business are owed by the company, including intellectual property assets (it is not always clear who actually owns these, particularly where the company has grown over a long time) and real estateâ˘separating out assets or trade which are not necessary for the business that is to be floatedâ˘incorporation of the business, where it is not already in a companyThis planning should be done as early as possible, to minimise any associated tax costs.Transfer of assets to the company by shareholdersWhere assets used by the company are owned by shareholders, either as a deliberate policy where the premises are owned by a shareholder as part of tax planning, or accidentally such as where intellectual property developed by a shareholder is used by the company without formal licence or payment of royalties, it will usually be necessary to transfer the assets to the company as the company will usually need to be floated owning all the assets necessary to the business for a flotation to be successful. Investors are rarely keen to
Family investment company (FIC)
Family investment company (FIC)What is a family investment company (FIC)?An FIC can apply to many different types of company structures used for different purposes although originally they began as estate planning vehicles. This guidance note summarises how an FIC can be a useful structure for a family business and provides links to additional sources of information. The structuring of FICs is a complex area with a lot of options on how to hold the shares, etc, therefore if an FIC structure is implemented, advice should be taken from relevant legal and tax experts.Essentially, an FIC is simply a company that has been established with the specific purpose of meeting the needs of, usually, a single family. An FIC allows the founders of the business to retain some involvement in the company and possibly a managed income stream but also pass the investments down to their children or grandchildren. They may be favoured above trusts because they are a more familiar structure but the option of using trusts should also be considered, see the Taxation of trusts â introduction guidance note and the attached comparison of a FIC and a discretionary trust:The FIC is usually set up as a new company with a moderate level of share capital, eg 10,000, £1 ordinary shares to provide a reasonable capital base. Giving the family cash amounts in order to allow them to then subscribe for shares means that there are no issues of share valuation.Investments can be in any form that a
Preparing group for sale or acquisition
Preparing group for sale or acquisitionOften a company or group of companies has developed gradually over years, with different businesses being run within a single company or the group structure being overly complex for historic reasons. When a decision is made that a group, sub-group, single company, business or a collection of assets should be divested, it is often necessary to restructure in order to rationalise the structure and/or separate out the parts that are to be sold.This note considers the various issues that should be considered before a sale. Indeed, groups may wish to consider these issues periodically to ensure that their structure is suitable for a quick sale if the opportunity arises suddenly.However, many companies will not address them until a potential buyer has already been identified and commercial negotiations have already started. In that case, these issues should be considered alongside the factors that should be taken into account when deciding on the sale structure itself (see the Comparison of share sale and trade and asset sale guidance note). Note that even if an asset sale is preferred then it may still be sensible or commercially necessary to restructure the business so there is a single seller/sale by the individual shareholders and/or so it is clear that a separate, ongoing trade is being sold.Other guidance notes in this topic cover:â˘the tax implications of the sale structure, see the Tax implications of share sale and Tax implications of trade and asset sale guidance notesâ˘some specific
Company reorganisations â overview
Company reorganisations â overviewThis guidance note summarises some of the ways in which companies may reorganise their activities and some of the key tax considerations.A company may want to reorganise its activities or its share structure for a number of different reasons. The most common are to prepare for a sale (as often a buyer will want a new âcleanâ company to hold the trade) or to return capital to investors.In addition to the reorganisations discussed below, a company may also undergo a demerger process. In simple terms, a demerger involves the separation of a companyâs business into two or more parts, typically carried on by successor companies under the same ownership as the original company. For more details of demergers, see the Demergers - overview guidance note.Share for share exchangeA share for share exchange occurs when shares in one company are sold in exchange for new shares in the purchasing company. This type of transaction may also be called a âpaper for paperâ transaction, as the consideration may also be loan notes as well as (or instead of) the issue of new shares.Usually, a transaction of this type (where at least 25% of the original company are being sold) will be structured to fall within the reorganisation provisions relating to capital gains tax. The conditions that must be met to fall within this treatment and the tax effect of doing so are set out in the Share for share exchange guidance note and guidance on the clearance application
Capital reduction demerger â overview
Capital reduction demerger â overviewA capital reduction demerger is a non-statutory method to carry out a demerger.The stringent conditions for a statutory demerger and the chargeable payments rule can often make that demerger route unfeasible or undesirable. See the Statutory demergers - overview guidance note for details of these.Common scenarios where the statutory demerger route may not be suitable or indeed available include where:â˘the company does not have sufficient distributable reservesâ˘there are plans to sell the demerged business or businessesâ˘the business that is being demerged is not a trading businessIn such cases, there are two alternative non-statutory procedures for carrying out the demerger. One is through a reduction in the companyâs share capital, known as a demerger by way of a Companies Act reconstruction or a âcapital reduction demergerâ. The second is set out in Insolvency Act 1986, s 110, and is often referred to as a section 110 demerger or a liquidation demerger. This guidance note provides an introduction to capital reduction demergers. For guidance on demergers via a liquidation, see the Demerger via a liquidation â overview guidance note.An overview of the capital reduction demerger process and the typical steps involved are shown below. For the tax analysis of this type of demerger, see Capital reduction demerger â tax analysis. Advance HMRC clearance should be sought as part of the demerger process to obtain HMRCâs agreement that the proposed transactions are being carried out for bona fide commercial purposes and not for the avoidance
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