Share for Share exchange is often used when you are re-organising or creating a group and benefits from tax relief.
Basically if you don’t do a share exchange you would need to sell the shares at market value creating both Capital Gains and Stamp Duty costs.
In order to do a Share exchange you must have bona fide commercial reasons for doing it and it can’t be just to avoid tax. So for example you might want to create a group in order to separate trading and investment activities and enable an investment company to obtain mortgage finance (most lenders probably would not lend to a single company doing both trading and investment in the same company as it puts the investment at risk).
Here is a common scenario, a developer buys a commercial property to develop into residential and sell, but when the project completes the market conditions have changed they want to keep the residential properties and rent them out.
During the development they will have reclaimed VAT and the first grant of residential is Zero Rated, so they get full recovery. An investor would not get this.
So to avoid partial exemption for VAT its best to move to a new company and there are bona fide Commercial Reasons too as previously noted.
Although the reclassification to investment will create a profit and tax charge a group structure will provide Group SDLT relief. See these blogs for details.
What if you move a Property from Fixed Asset Investment to Trading Stock or Vice Versa? Appropriations and Reclassifaction – Steve J Bicknell Tel 01202 025252
Do you pay SDLT on Properties Transfers within a Group? – Steve J Bicknell Tel 01202 025252
The process basically has 4 stages.
Stage 1 – Form the new companies
Assuming you are now creating a new Holding Company with a New Investment Company, these need to be formed first.
Stage 2 – HMRC Clearance
Its not mandatory but it is best practice How to apply for clearance or approval of a transaction from HMRC – GOV.UK (www.gov.uk)
To get clearance you need to write a letter to HMRC setting out all the facts, the group structure and the commercial reasons, typically the letter is 6 to 10 pages long.
You can request advance clearances by sending an email to email@example.com. You do not need to send a paper copy.
Attachments should be no larger than 2MB. Do not send self-extracting zip files as HMRC software will block them.
If possible we would like to reply by email, but we need your permission to do so by including the following statement:
‘I confirm that our client understands and accepts the risks associated with email and that they are happy for you to send information concerning their business or personal details to us by email. I also confirm that HMRC can send emails to the following address (or addresses)….’
If you’re making the application on behalf of yourself or your company adapt this wording as necessary.
Stage 3 – The Contract
This is normally done by a solicitor.
The contract deals with the acquiring company and the shareholders of the target company under which the shares are to be acquired with the consideration being shares in the acquiring company.
Stage 4 – Stamp Duty Relief
As the acquiring company is paying consideration for the shares (the issue of its own shares), then the transaction is subject to Stamp Duty. However, relief can be claimed under s77 FA 1986 if the conditions are met and the anti-avoidance rule of s77A FA 1986 does not apply. HMRC guidance is at STSM042000 starting at STSM042410. After the conditions have been checked and a claim prepared, see “How to Claim Relief” on GOV.UK. The claim needs to be made within 30 days of the contract date and, as HMRC outline, various information will need to be attached to the e-mail claim including the stock transfer form.