Share For Share Exchanges
A share for share exchange takes place where the consideration paid by a purchasing company to the shareholders for their shares in a target company is in the form of shares.
Share for share exchanges are commonly used in restructuring scenarios. An example would be implementing a holding company structure where there are a few existing separate companies with individual shareholders. In this situation the individual shareholders of the separate companies will have their shares acquired (transferred to) the new holding company in exchange for the new holding company issuing shares in itself to the individual shareholders of the previously separate companies – which will now become wholly owned subsidiaries of the new holding company as a result of the share for share exchange.
The share for share exchange can be a taxable transaction as far as HMRC are concerned, regardless of the fact that no cash is being received, only shares as consideration. However there are various UK tax reliefs that will allow shareholders to avoid, minimise or defer any tax liability.
HMRC tax clearance
Where a shareholder exchanges shares (the old holding) for other shares (the new holding) as part of a sale, reorganisation or reconstruction of a company, provided certain conditions are met, the shareholder is not treated as having made a disposal of the old holding for the purposes of the taxation of chargeable gains. Instead, the shareholder is treated as having acquired the new holding at the same time, and for the same consideration, as the old holding.
Shareholders exchanging their shares in such circumstances usually first obtain clearance from HMRC so that they can benefit from official confirmation that no tax liability will arise as a result of the transaction.
The general principle underlying the tax neutrality of these transactions is that the ultimate owners (i.e. shareholders) of a business retain an interest in that business after the transaction has taken place. On the broad basis that there has been no change in the economic interests of those affected by the share exchange or reconstruction and that no value has been extracted from the underlying business as a result, it is inappropriate to tax the transaction.
In order to give such tax clearance, HMRC will need to be satisfied that the share for share exchange will:
a) be effected for bona fide commercial purposes, and
b) not form part of any scheme or arrangements with a main purpose of avoiding tax.
An effective tax clearance letter to HMRC should include the following:
a) It is made clear at the top of the letter which clearances are being applied for;
b) The details of all the principal parties involved in the transaction (jurisdiction of incorporation, registered number, tax office, unique taxpayer reference and a description of its trading activities) so that HMRC have enough information to identify each company and its relationship with the other companies involved so as to enable HMRC to investigate the companies further if needed;
c) A diagram to help illustrate the group relationships clearly;
d) Exact detail about how the proposed transaction is being structured and how it is intended to be carried out (including the draft share purchase agreement for the share exchange); and
e) A clear, commercial justification for the proposed transactions (there should be some benefit to the businesses of the companies and/or their shareholders from entering into the transactions such as the strategic acquisition of a business, enhancing shareholder value, merging two businesses and/or creating a more effective group structure to help the business grow).
Submitting the application as an attachment to an email will generally be the fastest method, although HMRC does not accept documents larger than 2MB or zip files. As a result of this restriction you can instead send a series of emails which shouldn’t cause any particular problems.
A pro forma template tax clearance letter and guidance document can be purchased at our shop.
If everything is presented clearly you should expect to hear back from HMRC (with a positive and definitive response) within four weeks of applying for clearance.
SEIS and EIS investors
If an EIS or SEIS shareholder disposes of their shares within three years of having first acquired those shares, then the general rule is that they will lose their right to tax reliefs.
Technically a share for share exchange amounts to a disposal because the shareholders are transferring their shares in return for having a shareholding in a different company.
However, HMRC will not view the shares as having been disposed (which will allow SEIS and EIS shareholders to keep their right to tax reliefs) if:
a) The only issued shares in the new holding company are owned by the subscribers, i.e. those named on the memorandum of association; and
b) 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.
In such a scenario a company should also ideally seek HMRC clearance in advance.
Business Asset Disposal Relief
Individuals need to take care not to lose the ability to claim Business Asset Disposal Relief following a share for share exchange if and when there is a future disposal of their new shareholding in the holding company. Business Asset Disposal Relief can be preserved in respect of a disposal of the newly acquired shares if:
a) The shares held in the old company (before the share for share exchange) were held for at least 24 months and were exchanged in return for at least 5% of the new holding company’s issued share capital;
b) The new company is a trading company or holding company of a trading company; and
c) The shareholder claiming Business Asset Disposal Relief is a director, officer or employee of the company, or one or more of the companies in the group.
HMRC has detailed rules on what qualifies as a trading company and clearance is often sought from HMRC on a company’s trading status.
Stamp duty
Stamp duty is usually payable at a rate of 0.5% by the acquirer of shares. However, in share for share exchanges the holding company will be granted relief from paying stamp duty by HMRC in the following circumstances:
a) The share for share exchange has not been set up for tax avoidance purposes (i.e. it is for commercial reasons);
b) The new holding company acquires all (not just some) of the existing company’s issued share capital;
c) The consideration to the existing shareholders is the granting of shares in the new holding company; and
d) The shareholders of the existing company acquire the same percentage and class of shares in the new holding company following completion of the exchange.
If you want to claim relief from paying stamp duty, you’ll need to write to the relevant HMRC office explaining clearly and in detail why you want to claim it. Ensure you enclose all the relevant transfer and supporting documents with the letter.
If HMRC confirms that relief is due, they’ll stamp the stock transfer form(s) with a non-chargeable adjudication stamp. However, if HMRC tells you that relief isn’t due, you’ll need to pay the appropriate amount of stamp duty so that the transfer document can be stamped.
If relief isn’t claimed then the buyer is required to pay the stamp duty in full.
Documentation
Approval from shareholders will need to be sought before a share for share exchange can take place. You should check the company’s articles of association and any existing shareholders agreement to see what the rights of the shareholders are in respect of a share for share exchange and how authorisation should be sought.
The key documentation then put in place to effect the share for share exchange will usually be as follows:
a) The clearance application to be made to HMRC;
b) Board and shareholder resolutions to approve the share exchange;
c) Stock transfer forms executed by those exchanging their shares in the existing company;
d) A share for share exchange agreement, between those transferring their shares in the existing company and the holding company who will be issuing the new shares;
e) A shareholders agreement and/or new articles in respect of the new holding company to govern the ongoing relationship between its shareholders.
An easy to adapt share for share exchange agreement (together with guidance notes) can also be purchased from our shop.
Our fees
If you’d like a firm of solicitors to handle all of the above (tax clearance and legal documentation) on your behalf then for straightforward scenarios our total fees are usually £1,500 – £2,000 plus VAT.
This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.
