If you exchange shares in your company for shares or debentures in the same or a different company as part of a company reorganisation, what are the tax consequences?
If certain share reorganisation tax rules apply, the reorganisation is not treated as a disposal of the original shares. Essentially the new shares or debentures stand in the place of the original shareholding – the base cost and acquisition date are unchanged.
This would be the case if:
- Your company replaced shares of one class with shares of another class, or
- You received shares or debentures from another company as part of the sale or takeover of your company.
Please note that these "paper to paper" rules do not apply to EIS or BES shares in most circumstances.
Warning regarding interaction with Entrepreneurs relief (ER)
Care needs to be taken if your existing shareholding would have qualified for ER on sale and the new shareholding would not. This could be the case if:
- You have less than 5% of the voting rights and ordinary share capital in the acquiring company.
- You are not an employee, director or officer of the acquiring company.
- Either of these apply at any time in the 12 months leading up to the disposal of the "new" shares.
If ER is lost as a result of the reorganisation you could be paying CGT at 28% instead of 10% on a subsequent sale.
Note that if the share exchange involves loan notes, then there are further implications that need to be considered.
There is a remedy. Although the share reorganisation rules set out above apply automatically, you can elect to disapply the rules in most cases. If you do elect then the reorganisation of your original shareholding will be treated as a taxable disposal – by claiming ER relief your CGT bill will be 10% of the chargeable gain.
Unless you can dispose of all or part of your shares prior to the tax payment date (usually the January following the end of the tax year in which the reorganisation occurred) you would need to take the funding of the tax payment into account before making the election.
This article only touches on the general principles of these arrangements. Actual circumstances are likely to be complex and will require significant planning in order to produce the best tax outcome. Please contact us if you would like more detail.
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