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CG52523 | Share exchange: TCGA92/S135: qualifying conditions: general

From HM Revenue & Customs · Capital Gains Manual

The relevant conditions for TCGA92/S135 to apply are

  • Acquiring company B either holds, or as a consequence of the exchange will hold, more than one quarter of the ordinary share capital of target company A, see TCGA92/S135(2) Case 1 below,

or

  • The shares or debentures are issued as a result of a general offer made to the members of company A, or to any class of them, in the first instance on a condition which if it is satisfied would give company B control of company A, see TCGA92/S135(2) Case 2 below,

or

  • Company B holds, or as a consequence of the exchange will hold, the greater part of the voting power of company A, see TCGA92/S135(2) Case 3.

If, on or after 1 December 2003, company A holds some of its own shares in treasury those shares don't count as issued share capital when it comes to deciding whether the conditions are met (see CG50287).

It should be emphasised that TCGA92/S135(1) requires company B to issue securities to a person as consideration for the securities provided by them in the exchange. The securities must be issued directly to that person for the share reorganisation treatment to apply.

HMRC’s view is that the use of the word “hold” means that to satisfy this condition, company B must hold the shares directly. Therefore, an acquisition by a wholly owned subsidiary of company B in exchange for an issue of shares by company B would not satisfy the condition. Ordinary share capital has the same meaning as in CTA2010/S1119 and ITA 2007 part 16, that is all the issued shares except those that have a right to a dividend at a fixed-rate but which have no other right to share in the profits of the company. It is extended by Section 135(4) to include rights of unit holders in unit trusts and interests in companies without issued share capital which are possessed by their members.

HMRC guidance on the meaning of "ordinary share capital" can be found in the Company Taxation Manual at pages CTM00511 to 00516.

The second condition applies where company B issues shares to the members of company A following its making a general offer that is conditional on it obtaining sufficient acceptances to give it control of company A. It will also apply where the offer is subsequently made unconditional.

For example, company B could write to all the shareholders in company A and offer to acquire their shares provided the offer is accepted by holders of 90 per cent of the issued share capital. Whilst the offer was still open company B could drop this condition. TCGA92/S135 would then apply to any shares in company A which were exchanged for shares in or debentures of company B even if the offer was unsuccessful.

Control is defined at CTA 2010/S450 and includes indirect control. Therefore, this case is capable of being met where, for example, the members of company A transfer their shares to a wholly owned subsidiary of company B.

There is no special tax definition of “general offer” for this purpose. HMRC accepts that an arrangement such as a Court approved scheme may be capable of being a general offer provided it applies to all members holding a particular class of security in company A and requires their consent.

As with Case 1, HMRC’s view is that the use of the word “hold” in this condition means that company B must exercise more than 50% of the voting power in company A directly.