Share for share exchange

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Share for share exchange

A share for share exchange re-organises your company’s shareholdings into a new holding company. Done right and the company, private investors, & employees can obtain tax reliefs. Fail to follow the correct process, and unforeseen tax liabilities emerge.  

Commercial reasons for a share for share exchange

Our client’s often incorporate a new holding company to:

  • Re-organise their group structure and transfer trades to different subsidiaries;
  • Create distributable reserves;
  • Streamline ownership;
  • Protect intellectual property assets by ring fencing liabilities;
  • Manage succession planning;
  • Facilitate a future sale;
  • Break-up: sell off particular trading activities and retain other trading activities.

Most likely, we have managed a similar transaction to yours. We will appreciate why a new holding company is beneficial, and tailor our tax advice accordingly.

Acrimonious shareholders

In some situations the shareholders may have fallen out and the re-organisation is part of a process to resolve disputes.  We do have the experience to manage shareholder disputes and work with you to achieve a desirable outcome.

Mechanics of a share for share exchange or a scheme of arrangement

When you incorporate a new holding company, there may be additional tax charges often resulting from a:

Share for share exchange

A share for share exchange is where you transfer shares in an existing company to the shareholders of new holding company; or

Separation of a business

The business separates into two or more businesses: this can be achieved via cash payments or a dividend in specie is often the preferred route as the assets of the business in effect fund the separation; or

Scheme of arrangement:

A scheme of arrangement is where you cancel the share capital of an old company, transfer the reserves to the new holding company, so the new holding company can issue shares to the old company’s shareholders.  A scheme of arrangement is where a court cancels an existing company’s entire issued ordinary share capital. It requires a court approved reduction.

The reserve created is then transferred to the new UK holding company. The new UK holding company then issues shares to the old company’s shareholders subject to the scheme.  A scheme of arrangement is less commonly adopted than a share for share exchange.

The main issue for shareholders receiving new shares as part of the share for share exchange or scheme of arrangement

Both a share for share exchange or a scheme of arrangement technically involve the disposal of shares in one company and the acquisition of shares in another company.  HMRC will be looking to subject the disposal to tax even though the shareholders do not receive any cash.  However, there are a number of legitimate reliefs available under the tax legislation which enable shareholders to minimise any liability to tax or defer tax until a physical sale of the shares takes place.

Tax consequences for shareholders

Re-organisations  carry inherent tax consequences.  We:

  • Breakdown the legislation;
  • Review the underlying assets which could generate chargeable disposals;
  • Determine if the transaction is capable of being implemented efficiently and make suggestions to improve the transaction;
  • Provide clear and practical commercial and tax advice;
  • Obtain advance clearance from HMRC to avoid tax surprises.

Stamp duty exemption on a qualifying share for share exchange

Stamp duty applies to instruments transferring stock and agreements to transfer securities. So stamp duty:

  • Applies on a share for share exchange;
  • Does not apply on a scheme of arrangement.

This is because on a scheme of arrangement share are cancelled and re-issued, rather than transfered to the new holding company.

However, stamp duty is payable by the new holding company at a rate of 0.5%, if:

  • A holding company acquires the shares of an existing company;
  • In return, the shareholders receive shares in the new holding company.

Exemption from stamp duty

The good news is that HMRC offer a stamp duty relief for the new holding company if:

  • The share for share exchange is for commercial reasons and not for tax avoidance; and
  • The new holding company acquires all the existing company’s issued share capital; and
  • The consideration to the existing shareholders is the granting of shares in the new holding company; and
  • The shareholders of the existing company acquire the same percentage and class of shares in the new holding company following completion of the exchange.

Share for share exchange: private investor tax reliefs

Private investors should be concerned they will lose their tax reliefs, whether the share transfer is through a scheme of arrangement or a share for share exchange.  There are EIS reliefs and Entrepreneurs-relief to consider.

EIS Reliefs

EIS shareholders must not dispose of their shares within three years of their acquisition. However, HMRC will not consider the shares to be “disposed”, which may preserve income tax reliefs, if:

  1. The only issued shares in the new holding company are owned by the subscribers, i.e. those named on the memorandum of association; and
  2. The new holding company acquires all, not just some, of the existing company’s issued share capital on a share for share exchange or under a scheme of arrangement; and probably
  3. You obtain HMRC clearance in advance.

Entrepreneurs’ relief

You may lose entrepreneurs’ relief on a share for share exchange if there is a future disposal of the holding company’s shares. However, you can preserve entrepreneurs’ relief  on a disposal of the newly acquired, holding company’s shares if:

  1. The shares have been held for 12 months and represent 5% of the new holding company’s issued share capital; and
  2. The company is a trading company or holding company of a trading company; and
  3. You, the individual, is an officer or employee of the company, or one or more of the companies in the group.

HMRC has strict rules on what does and does not qualify as a trading company.  The conditions are ever changing and currently under HMRC’s spotlight. Hence it is crucial to know their conditions on the transaction date. Again, it is is best to obtain HMRC’s clearance in advance.

Hold over elections to defer a charge to capital gains tax arising under the re-organisation

In some cases, depending upon the facts, we may recommend the use of hold over elections.  A hold over election defers a charge to capital gains tax which may arise as part of the re-organisation until such time as the shares are disposed of and proceeds are received.

Hold over elections to need to be reported to HMRC to be effective and binding.  Our service includes advice on HMRC reporting.

Share for share exchange:  employee share plan pitfalls

We often review employee share plans. We manage the implications, and the required employee communications be it a share for share exchange or a scheme of arrangement.

HMRC approved share plans

Many HMRC approved share plans provide for a roll over of option and share rights following a share for share exchange or scheme of arrangement. This prevents early exercise or disqualification from HMRC approved status.

For EMI and CSOP options, the tax legislation provides for roll over. So, many plans cover this situation. However, we’ve seen many plans that don’t cover this situation. Then it depends on interpreting the contractual documentation, plus  the relevant approved tax legislation.

Unapproved share plans

What happens to share rights of unapproved share plans is more complex. The plan may be an unapproved share option or an long term incentive plan. The answer depends on the plan rules and share plan documentation for both a share for share exchange and a scheme or arrangement.

Both the share for share exchange and scheme or arrangement might unintentionally be a trigger event. This would cause the early vesting or exercise of rights. If the shares have not realised their planned maturity value on the reorganisation date, then a forced early exercise of share plan rights could be detrimental to the employee shareholder.

However, we provide the practical solutions based on the facts of each particular situation.

Implementation of a share for share exchange or scheme of arrangement

We will prepare the implementation checklist and timeframe enabling you to prepare and manage expectations.

Shareholder approval will be needed to a share for share exchange or scheme of arrangement

You must obtain shareholder approval for a transaction involving either a share for share exchange or a scheme of arrangement. The Articles of association or Shareholders agreement may include veto rights which must be factored into the planning process. We manage all compliance issues including board approval and shareholder resolutions.

Documentation needed to implement the share for share exchange, scheme of arrangement or other transaction relating to shares

We will deal with all of the documentation and filings required at Companies House.  We handle:

  • The revised articles or shareholders’ agreement to fit the structure post transaction;
  • The consultation with any employees affected as a result of TUPE transfers and prepare any revisions required to Employment documentation such as revised non-complete clauses;
  • The clearance applications required from HMRC;
  • Advertising in the Law Society Gazette if required;
  • Shareholder resolutions;
  • Stamping documentation and dealing with HMRC;
  • Reporting and payment of any taxes to HMRC;
  • Production of ancillary documentation such as stock transfer forms.

Track record in successful implementation of share for share exchanges

Recent instructions involving share for share exchange include:

  • Internet service testing company’s share for share exchange: structured to prevent the company’s shareholders losing their entrepreneurs’ relief entitlement;
  • Software manufacturer acquires UK branch: obtained advance clearance from HMRC before registering the new holding company, and so relieved the holding company from a stamp duty charge;
  • Protected income and capital tax reliefs for EIS shareholders: prepared EIS documentation that prevented the existing EIS shareholders’ shares from being regarded as “disposed” on a share for share exchange, and so protected the reliefs;
  • Metal production company’s scheme of arrangement:  the company operated in both France and the UK.