What is a share for share exchange for capital gains?

Here is a comprehensive explanation of a share for share exchange for capital gains purposes.

What the law says

A share for share exchange is governed by TCGA 1992, section 135. It applies where a company ("company B") issues shares or debentures to a person in exchange for shares in or debentures of another company ("company A") in one of three circumstances:

• Case 1: Company B holds, or in consequence of the exchange will hold, more than 25% of the ordinary share capital of company A.
• Case 2: Company B issues the shares as the result of a general offer made to members of company A, made on a condition that if satisfied would give company B control of company A.
• Case 3: Company B holds, or in consequence of the exchange will hold, the greater part of the voting power in company A.

The "no disposal" treatment

Where section 135 applies, sections 127 to 131 TCGA 1992 apply with the necessary adaptations, treating company A and company B as the same company and the exchange as a reorganisation of share capital.

Under section 127, a reorganisation is not treated as involving any disposal of the original shares or any acquisition of the new holding. Instead, the original shares and the new holding are treated as the same asset, acquired when the original shares were acquired. This means any capital gain is deferred until the new shares are eventually sold.

The anti-avoidance rule (section 137)

Section 135 has effect subject to section 137(1). Under section 137(1), neither section 135 nor section 136 shall apply unless the exchange:

1. is effected for bona fide commercial reasons, and
2. does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to CGT or corporation tax.

However, this anti-avoidance rule does not apply where the person receiving the shares holds 5% or less of the shares or debentures of the company (including holdings of connected persons).

HMRC guidance / practice

Effect of the "no disposal" treatment

Where a share for share exchange falls within TCGA 1992 section 135 and all conditions are met, section 127 applies to the shareholders of the target company (company A), meaning there is no disposal at the time of the exchange and the new shares are treated as acquired at the same time and for the same consideration as the original shares.

Effect of the anti-avoidance rule applying

If the anti-avoidance rule in section 137 applies (i.e. the exchange is not for bona fide commercial reasons or is part of a tax avoidance scheme), section 135 will not treat the exchange as a share reorganisation. Shareholders will then be treated as disposing of the securities given in the exchange rather than benefiting from the "no disposal" treatment under section 127.

Clearance

Taxpayers can apply to HMRC for advance clearance under section 138 TCGA 1992 to confirm that section 137 will not apply to their transaction. Relief under sections 135 and 136 is only available if the arrangements are carried out for bona fide commercial reasons and do not form part of arrangements where the main purpose, or one of the main purposes, is to avoid tax.

Exchanges involving qualifying corporate bonds (QCBs)

Where company B issues qualifying corporate bonds (QCBs) rather than shares in exchange for shares in company A, a special rule applies. Although section 127 would in the first instance apply, section 116 TCGA 1992 intervenes to prevent section 127 applying at the time of the exchange. Instead, a computation is prepared to determine the chargeable gain or allowable loss that would have arisen at the time of the exchange, and that gain or loss is deemed to accrue at the time of the eventual disposal of the QCBs.

Budget 2025 changes

Changes to the section 137 anti-avoidance rule were announced at Budget 2025. The Capital Gains Manual will be updated once the Finance Bill receives Royal Assent.