A share for share exchange is where a company issues shares to a person in exchange for shares in another company. These exchanges often occur when forming new holding companies in order to transfer assets out of the original company. To ensure the transaction is tax neutral and does not result in chargeable gains such as capital gains tax, income tax and stamp duty, these exchanges need serious consideration and thought.
The qualified tax experts here at Williamson & Croft offer Share for Share Exchanges as a service and we can help you if this is something you’re interested in. But first, let’s take a look at why you might consider this and the benefits.
What is a Share for Share Exchange?
A share for share exchange is a type of equity swap. The two parties involved in the exchange agree to exchange shares of one company for shares of another, or they agree to swap stock with each other.
This allows them to maintain their current level of ownership while obtaining a different set of assets.
Exchanges of shares are used in many different situations to achieve a variety of goals, including:
- Corporate acquisitions: When a corporate buyer issues its own shares as a way of paying for the shares of another company.
- Group reorganisation: In order to streamline a company before being sold, a group can be re-organised in order to protect assets or create a new holding company.
What Are The Benefits Of Holding Shares In A Holding Company?
We often get asked this question from many businesses across the digital & creative, retail & eCommerce and property industries, as well as many more. One of the main reasons to conduct a share for share exchange is to ensure profits that you have worked hard to create can be retained outside of the trading company without incurring an income tax charge.
By doing this, you’re ensuring that profits are protected and can be used if you’re struck by adverse business conditions at some point in the future.
Other reasons include:
- Consolidation of a number of companies so that they operate together more effectively.
- To split the structure of your business if it’s best for one strand of the business to operate independently.
- If an acquisition is on the horizon and it makes sense for a new company to slot into the structure.
- If assets need to be moved around to ensure they are in the most efficient tax location and be protected.
What You Need For A Share For Share Exchange
There are a few things you need in order to implement a successful exchange. These include a checklist, a proper time frame, a qualified tax advisor and the following:
Shareholder Agreement
It is essential you get the thumbs up from your shareholder for this exchange of a scheme of arrangement.
Thankfully, the team here at Williamson & Croft will manage compliance issues like board approval.
Documentation
There is considerable documentation to complete with these types of exchanges that can dissuade people from going down this road. However, we’ll be able to deal with that, leaving you to focus on the things that really matter. We’ll handle:
- Revised article and shareholder agreement so the structure remains sound once the transition has been completed
- Consultation with employees that are affected by this transaction
- The clearance application required by HMRC
- Document stamping and liaising with HMRC
- Reporting and payment of any taxes to HMRC
What are the Tax Consequences of a Share for Share Exchange?
The tax consequences of a share for share exchange are, in most cases, not very complex. A shareholder can swap shares without incurring any tax consequences.
A company that exchanges shares with another company will typically be considered an ‘acquiring corporation’ and the other company will be considered a ‘target company.’ For tax purposes, this means that if you own stock in one of these companies and it is exchanged for stock in another company, your new shares will effectively be treated as if you purchased them at the fair market value of all of the assets and liabilities of the target company.
The only exception to this rule is if there are any outstanding obligations or debts owed by the target corporation before they are exchanged for new shares; these must be taken into consideration when determining fair market value.
Can a Gain on the Sale of the Shares Qualify for Business Asset Disposal Relief?
Business asset disposal relief (BADR) may be available if the conditions are met when an individual shareholder or trustee disposes of shares in a company.
If share for share treatment is applied, there will be no immediate gain, thus no BADR. BADR, however, may be obtained by triggering an immediate gain taxable as CGT, particularly if shares of the other company are subsequently disposed. Electing to not apply share exchange treatment allows for this. Furthermore, the election must be made by the 31st of January following the year of disposal.
Accounting for Share For Share Exchanges
The approachable team here will happily guide you through this process and offer advice and tips that can make this progress as seamless as possible.
To facilitate the restructure whilst managing tax risks or where possible without creating any tax liabilities, we would ensure appropriate tax advice/recommendations are provided and sufficient legal documentation is drafted. Our advice would cover:
- Analysis to ascertain the current market value of the shares for the companies involved in the transaction;
- Capital gains tax implications and availability/conditions are satisfied for relief along with commentary on how tax base costs of the shareholders are dealt with;
- Stamp duty implications and availability of stamp duty relief;
- Analysis of anti-avoidance legislation that would seek to deny or counteract reliefs and recommendations to manage any potential anti-avoidance risks;
- Obtaining clearance from HMRC under transactions in security legislation;
- Application for stamp duty relief on or after completion of the transaction; and
- Summary of key accounting considerations for the purpose of maintaining correct bookkeeping immediately on completion.
If this service looks like something that would be beneficial to you, your shareholders, or your business, then please get in touch with the experts here at Williamson & Croft.
Share For Share Exchange FAQs
What is a scheme of arrangement?
Using a scheme of arrangement, the old company’s share capital is cancelled, its reserves are transferred to the new holding company, and shares are issued to the shareholders of the old company. When a court approves a scheme of arrangement, the entire issue of ordinary shares is cancelled.
It is necessary to apply to the court for a scheme of arrangement. Due to this, schemes of arrangement are relatively uncommon.
Is tax advice required?
Share exchanges can have significant tax consequences depending on the terms of the proposed transaction. Therefore, it is always a wise idea to obtain tax advice before embarking on any share exchange.
Upon satisfaction of certain conditions, a share for share exchange will be considered to be a re-organisation for tax purposes and there will be no tax charge to be paid at the time of the exchange. In the event that a chargeable gain arises at completion of the share exchange, you can apply to HMRC for an advance clearance. This will ensure that you will not be liable to pay any tax.
