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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Share exchange: examples: effect of TCGA92/S135 and computations

The aim of the legislation is to ensure that the share exchange is not treated as a disposal. It does this by deeming the share exchange to be a share reorganisation to which the provisions of TCGA92/S127-TCGA92/S131 apply. TCGA92/S135 (3) provides that the two companies involved in the exchange should be treated as the same company. The exchange is a reorganisation of that notional company’s share capital to which the share reorganisation provisions apply with necessary adaptations. This means that for capital gains purposes there is no disposal of the old shares or acquisition of the new shares. Instead the new shares are treated as the same asset as the old shares and acquired at the same time and for the same cost as the old shares. If the relevant conditions are satisfied the application of Section 135 is mandatory. It is not a relief that a taxpayer must claim.

The nearest parallel is with a conversion of shares in which one class of share is cancelled and a different class issued. In that case, as with a share exchange, the shareholder will not hold any of the original shares. In effect the new shares stand in the place of the old shares. This is unlike a bonus issue or rights issue in which the shareholder will continue to hold the original shares. Also, in contrast to a rights issue, it would be unusual for a shareholder to have to give further consideration at the time of a share exchange.


  • November 1986 a taxpayer subscribes at par for 10,000 £1 ordinary shares in Bright Eyes Ltd.
  • September 1992 Bright Eyes Ltd is taken over by Commercial Glasses PLC in exchange for the issue of four Commercial Glasses PLC shares for every Bright Eyes Ltd share held.
  • The taxpayer is treated as having acquired their holding of 40,000 Commercial Glasses PLC shares for a consideration of £10,000 in November 1986.
  • The same rules would apply if, instead of issuing new shares, Commercial Glasses PLC had transferred shares out of treasury in exchange for the Bright Eyes Ltd shares (see CG 52522).

All the normal computational rules of TCGA92/S127-TCGA92/S131 apply. Full instructions on share reorganisations can be found at CG51700+. In particular CG51890+ deals with the apportionment of costs.