What is a company reconstruction for tax purposes?
Answered 17 March 2026
What is a Company Reconstruction for Tax Purposes?
What the law says
The term "scheme of reconstruction" is defined in Schedule 5AA to TCGA 1992 for the purposes of key CGT provisions, most notably TCGA 1992 s.136 (scheme of reconstruction involving issue of securities) and CTA 2009 s.818 (company reconstruction involving transfer of business — intangible fixed assets).
TCGA 1992 s.136 applies where an arrangement between a company ("company A") and its shareholders/debenture holders is entered into for the purposes of, or in connection with, a scheme of reconstruction, and under that arrangement another company ("company B") issues shares or debentures to those persons in respect of and in proportion to their relevant holdings in company A, while the shares in company A are retained, cancelled or extinguished. Where it applies, the persons are treated as exchanging their holdings — i.e. no disposal occurs for CGT purposes.
CTA 2009 s.818 applies where a scheme of reconstruction involves the transfer of the whole or part of the business of one company (the transferor) to another (the transferee), and the transferor receives no consideration for the transfer (other than the transferee taking over liabilities). Where it applies, the transfer of chargeable intangible assets is tax-neutral. The section does not apply to intra-group transfers (s.775), to qualifying friendly societies or dual resident investing companies, and only applies if the reconstruction meets the genuine commercial transaction requirement (s.831). The term "scheme of reconstruction" in s.818 has the same meaning as in TCGA 1992 s.136.
HMRC guidance / practice
Definition under Schedule 5AA TCGA 1992
A scheme of reconstruction is defined in Schedule 5AA TCGA 1992 as any scheme of merger, division or other restructuring that meets all of the following:
- The 1st condition, the 2nd condition, and either the 3rd or 4th condition.
The scheme can involve the whole or part of the business or businesses of one or more companies being transferred to one or more companies.
In broad terms (as illustrated by HMRC's guidance and examples):
- The 1st condition requires that a successor company issues ordinary shares only to the holders of the class(es) of ordinary shares in the original company that are involved in the scheme — and to no one else.
- The 2nd condition relates to proportionality — each person holding a class of ordinary share involved in the scheme carries the same entitlement to acquire ordinary shares in the successor company.
- The 3rd condition requires that, taking the activities of the successor companies together, they carry on substantially the whole of the business of the original company.
- The 4th condition is an alternative to the 3rd (the sources retrieved do not set out its precise text, but it applies in certain cases where the 3rd condition cannot be met).
Case law definition (for other statutory contexts)
For the purposes of FA 1986 s.75(1) (stamp duty), the term "reconstruction" is not defined in statute, but case law has established that a scheme of reconstruction comprises:
"the transfer of the undertaking, or part undertaking, of an existing company to a new company with substantially the same members, and must involve the carrying on by the new company of substantially the same business as that transferred" (Brooklands Selangor Holdings Ltd v IRC [1970] and Baytrust Holdings Ltd v IRC [1971]).
Critically, there must be no change in the real ownership at the end of the scheme. Neither a split of a company into two parts going to separate shareholders, nor the distribution of assets not forming part of the undertaking, constitutes a reconstruction.
Practical points
- Many schemes of reconstruction are effected using the Companies Act 2006 or the Insolvency Act 1986, but it is not essential to use those Acts — TCGA 1992 ss.136 and 139 can apply to any scheme meeting the Schedule 5AA definition.
- "Company reconstruction" is a term of general usage. A share exchange may be a scheme of reconstruction or amalgamation, but a share exchange only needs to satisfy TCGA 1992 s.135(2) and does not necessarily have to be a scheme of reconstruction. By contrast, both ss.136 and 139 require a scheme of reconstruction as defined in Schedule 5AA.
- The scheme must be for bona fide commercial reasons and not part of a tax avoidance scheme (TCGA 1992 s.137).
Citation sources
This example is based on a sports club but the same principles apply as with any other company. The Piltdown Cricket Club is an unincorporated association with playing and social members. It owns a ground with a clubhouse that has a bar which is let out for social events. It wishes to incorporate so a company limited by guarantee is created which issues membership rights to the Club members that correspond to their interests in the association. The property and the sporting and social activities
The term ‘reconstruction’ in FA86/S75(1) is not defined, but it has been held that a scheme for the reconstruction of a company comprises the transfer of the undertaking, or part undertaking, of an existing company to a new company with substantially the same members, and must involve the carrying on by the new company of substantially the same business as that transferred (BrooklandsSelangor Holdings Ltd v IRC [1970] 2 All ER 76 and Baytrust Holdings Ltd v IRC [1971] 3 All ER 76). For there to
as the meaning given by Schedule 5AA to this Act; b references to “ relevant holdings ” of shares in or debentures of company A are— i where there is only one class of shares in or debentures of the company, to holdings of shares in or debentures of the company, and ii where there are different classes of shares in or debentures of the company, to holdings of a class of shares or debentures that is involved in the scheme of reconstruction (within the meaning of paragraph 2 of Schedule 5AA); c re
A scheme of reconstruction is defined in Schedule 5AA TCGA 1992 as a scheme of merger, division or other restructuring meeting the relevant conditions of that Schedule. A scheme of merger, division or other restructuring can involve the whole or part of the business or businesses of one or more companies being transferred to one or more companies. See CG52720. The scheme of reconstruction must meet both the 1st, 2nd and either the 3rd or 4th of the conditions below:
Part 8 Intangible fixed assets Chapter 11 Transfer of business or trade Tax-neutral transfers Company reconstruction involving transfer of business 818 1 This section applies if— a a scheme of reconstruction involves the transfer of the whole or part of the business of one company (“ the transferor ”) to another company (“ the transferee ”), and b the transferor receives no part of the consideration for the transfer (otherwise than by the transferee taking over the whole or part of the liabiliti
This Schedule defines scheme of reconstruction for the purposes of sections 136 TCGA. A scheme of reconstruction means any scheme of merger, division or other restructuring that meets the first and second condition and either the third or fourth of the following conditions.
The easiest way to illustrate what a scheme of reconstruction looks like in practice is by reference to examples. Many schemes of reconstruction will be effected using specific provisions of the Companies Act 2006 or the Insolvency Act 1986. But it is not essential to use these Acts. TCGA92/S136 and TCGA92/S139 are capable of applying to any scheme of reconstruction as defined in Schedule 5AA. For each of the following examples at CG52721 - CG52728 you can assume that the second condition of Sch
Part IV Shares, securities, options etc. Chapter II Reorganisation of share capital, conversion of securities etc. Company reconstructions ... Scheme of reconstruction involving issue of securities 136 1 This section applies where— a an arrangement between a company (“ company A ”) and— i the persons holding shares in or debentures of the company, or ii where there are different classes of shares in or debentures of the company, the persons holding any class of those shares or debentures, is ent
Company A originally had one class of ordinary shares but prior to demerging part of its business to company B it reorganises its ordinary share capital into X & Y shares. Only the Y shares carry the rights to the part of the business that is to be demerged. The class of share involved in the scheme of reconstruction is the Y shares and it is to the holders of the Y shares that company B must issue ordinary shares. Note that paragraph 6 also applies to the 2nd condition of Sch 5AA, see below. A
Inskip Enterprises Ltd (the original company) has ordinary share capital of one class only, owned entirely by the Inskip family. The company carries on 2 businesses of hiring pleasure boats, and building and repairing boats. It is decided the two activities should be separated into different companies. The company enters into a scheme under Section 110 Insolvency Act 1986. As part of the scheme of reconstruction the original share capital of Inskip Enterprises Ltd is reorganised into A shares an