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HMRC internal manual

Capital Gains Manual

Share exchange: scope of TCGA92/S135


Subject to the conditions in CG52523, TCGA92/S135 will apply 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 effect, company B is buying the shares in, or debentures of, company A but paying for all or part of the purchase by issuing its own shares or debentures. From 1 December 2003 onwards, disposals of shares out of treasury are treated as issues of shares. The purchase can include any combination of shares and debentures. Therefore, shares can be issued for shares and debentures. Debentures can be issued for debentures and shares.

(Shares, debentures or membership interests can be issued for membership interests in a company without share capital.)

However, from 1 December 2003 onwards, where the original company was holding its own shares in treasury at the time of the exchange, no issue of shares can be made in respect of those treasury shares, as their rights are restricted under Companies Act 1985 new section 162C. To do so would also mean that company B and company A hold shares in each other, breaching S23 Companies Act 1985.

Furthermore, TCGA92/S135 refers to an “exchange”. If Company A gives up shares treated as cancelled for a shareholding in an active company this cannot be described as an exchange.

These transactions are often called a share exchange. But an essential feature is that company B actually issues shares or debentures. TCGA92/S135 will not apply to a straight swap of shares that have already been issued.

From 1 December 2003 onwards the Companies Act allows a listed company to buy back its own shares and hold them “in treasury”. (For this purpose “listed” includes shares dealt in on the Alternative Investment Market (AIM) of the London Stock Exchange.)

A company that holds its shares in treasury can sell those shares back into the market, cancel them, or otherwise dispose of them.

FA03/S195 (8) provides that a disposal of shares out of treasury is treated as an issue of new shares for most tax purposes (this includes tax in respect of chargeable gains).

This point is covered in more detail at CG50209.