Share for share exchange

Share for share exchange guide

Share for share exchanges are used for a wide variety of commercial reorganisations and mergers and acquisitions. It is possible for shareholders to swap shares and not trigger any tax charges.

What is a share for share exchange?

In simple terms a share for share exchange is where a company exchanges or issues shares in consideration of the exchange or issue of shares from another company. The main benefit is that for tax purposes, if the transaction is structured correctly, shareholders who have exchanged their shares will not be considered to have disposed of their original shares and their shareholding will be treated, for tax purposes, as at the original cost of the shares pre-swap.

A common example of a share for share exchange with a restructuring is where a holding company is created for a group structure.

When to consider a share for share exchange

The uses of a share for share exchange are flexible and wide enough to cover many situations.  We implement share for share exchanges in a wide variety of situations.  In our experience the most common scenarios include:

  • creating a group structure and transferring parts of your business to different subsidiaries.
  • as part of a mergers or acquisitions.
  • whare you want to create distributable reserves;
  • to streamline ownership.
  • ringfencing liabilities – this is quite popular in IP and tech companies where they wish to protect the IP in the event of business failure/liquidation.
  • manage succession planning.
  • making a business more attractive for sale.
  • settling shareholder disputes.

Structuring a share for share exchange

The structure for share for share exchanges can be flexible. The approach will vary according to your circumstances. The structures need plotting out under a step list to manage the order of events and to minimise mistakes.

A share for share exchange involves the transfer of shares in an existing company to the shareholders of a new holding company.  The shareholders can be the same in the old and new companies or new shareholders can be introduced.

The basis of the exchange often needs thinking through to ensure the transaction is tax neutral. For example, one share in company A may be worth 5 shares in company B. All depends upon the facts.

Often share for share exchanges take place with a transfer of assets from one company to another.

How to implement a share for share exchange

For a successful transaction you will need a checklist and time frame enabling you to prepare and manage expectations.

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.

Documents needed for a share swap

We can 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 the re-organisation;
  • Review of the employment contracts and policies to see if the they are suitable for the new structure;
  • The clearance application required from HMRC;
  • Shareholder resolutions;
  • Stamping documentation and dealing with HMRC;
  • Reporting and payment of any taxes to HMRC; and
  • Production of ancillary documentation such as stock transfer forms.

Alternatives to a share for share exchange

A business split can be achieved via cash payments, a transfer of assets or a Scheme of Arrngement.  A transfer of assets is often achieved by a dividend in specie.  In addition to tax considerations there are obligations for the directors to consider before deciding on cash or asset payments.

  • Dividend in specie are popular as the assets of the business in effect fund the separation.
  • If there is physical property involved special attention needs to be paid to stamp duty land tax questions.

Are there risks and pitfalls?

The main risks are tax risks together with the usual risks where a share for share is used for a merger, of the transaction not proceeding and consequent waste of time and money.

On the tax side,  HMRC will be looking to subject the share transfer 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 issues and possible relief

Depending upon the shareholder base the following concerns may need addressing:

  • Can a clearance as to tax neutrality be obtained from HMRC? – The company can apply to HMRC for a tax clearance to the effect that there is no capital gains tax arising when shareholders swap shares in one company for another company.  The clearance can also confirm that there is no income tax liability for individual shareholders. We recommend HMRC clearances are obtained as there is no charge made by HMRC and they do provide some degree of certainty for tax payers.
  • Impact for SEIS and EIS investors under the share for share exchange -Generally speaking EIS shareholders lose their tax reliefs on disposal within three years of their acquisition. A share for share exchange is a disposal because the shareholders swap shares and end up holding shares in a different company. However, HMRC will not consider the shares to be “disposed”, which may preserve income tax reliefs, if the only issued shares in the new holding company are owned by the subscribers, i.e. those named on the memorandum of association; andThe 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 probablyYou obtain HMRC clearance in advance.
  • Is Business Assets Disposal Relief (entrepreneurs’ relief) preserved? – you may lose Business Assets Disposal Relief (entrepreneurs’ relief) on a share for share exchange if there is a future disposal of the holding company’s shares. In cases of doubt an HMRC’clearance can be obtained.
  • CGT Hold over election? – In some cases, depending upon the facts, we may recommend the use of hold over election to defers a charge to capital gains tax. Holld over elections do need to be reported to HMRC to be effective and binding.  Our service includes advice on HMRC reporting.
  • Share options – you will need to review employee share option plans before implementing a share for share exchange as there may be implications to address. What happens to share rights of option holders depends on the plan rules and share plan documentation. A share for share exchange might unintentionally be a trigger event causing early vesting or exercise of rights.
  • Stamp duty – may be payable at 0.5% but there may be available exemptions. The rules are quite complex.

Benefits of working with us

We are a specialist law firm with a strong tax capability made up of solicitors, members of the Chartered Institute for Taxation and the Chartered Institute of Accountants. We combine tax law with the practicalities.

  • We handle demergers, structures with new holding companies, structures designed to ring fence liabilities and related issues. Our clients include accountants who refer. This is a specialist area to us. We can reorganise all assets including property transfers.
  • Our focus is on private companies, their directors and shareholders and we understand that issues are linked.
  • Combining legal with tax means that we can draft the agreements as well as obtain the HMRC tax clearances.  We also deal with the shareholder resolutions and filings at Companies House.

Let us take it from here

Call us on 020 7438 1060 or complete the form and one of our team will be in touch.