A Case Study: Share for Share Exchange and Group Structures in the UK

The UK tax system offers several advantages to companies that are part of a group, helping to encourage long-term investment, business growth, and greater flexibility to groups. However, many business owners are either unaware of these benefits or do not take steps to bring their companies under a formal group structure. It’s common to see individuals owning multiple companies without setting up a group, even though doing so can unlock useful tax reliefs.

When a shareholder wants to move one company under another to form a group, i.e. by selling shares to a new or existing holding company, it can trigger large tax liabilities, especially Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT).

But where there are clear commercial reasons for the reorganisation of the companies, and the scheme isn’t designed to avoid tax, a share-for-share exchange can be used to bring companies into the same group without immediate tax charges. The intentions of the shareholders and the commercial need for the arrangement are key to making this work.

In this case study, we look at a real-life example of how a share for share exchange was used to create a UK group structure, and the tax benefits that followed.

Understanding Share for Share Exchanges

A share for share exchange, as the term implies, is a transaction where shares in one company are exchanged for shares in another. It is a part of a reorganisation or restructuring arrangement, allowing one company to acquire another by issuing its own shares to the shareholders of the Target Company. As a result, the target company becomes a subsidiary of the acquiring (or new holding) company.

To illustrate: Ben owns 100% of the shares in both PropCo Ltd and OpCo Ltd. He now wishes to insert a new holding company above both. Normally, transferring his shares in PropCo and OpCo to the new HoldCo would trigger a CGT for Ben and Stamp Duty (SD) for HoldCo.

However, if a valid share-for-share exchange is in place, Ben can transfer his shares in PropCo and OpCo to HoldCo in return for new shares in HoldCo, without triggering CGT or SD to either party.

Background for the Case Study

Mr. Carter, a non-UK tax resident, and Mr. Davies, a UK tax resident, jointly own two offshore companies, both incorporated and tax resident in BVI. These companies, DCFC Ltd and LRS Holdings Ltd, each hold separate portfolios of UK properties. Both companies are equally owned by the partners, with each holding a 50% share.

Originally, these offshore companies were established as part of a strategy to mitigate UK inheritance tax exposure. However, recent changes in UK tax legislation, along with significant increases in corporate administration and accounting costs, have reduced the benefits of maintaining multiple offshore companies. What was once a cost-effective and efficient structure has become increasingly expensive and less practical.

The details of the properties held by each company are as follows:

DCFC Ltd Property Portfolio

LRS Holdings Ltd Property Portfolio

Now the plan is to create a new company in the UK which will hold all the properties, create another company which will be involved in the development of properties. Also, create a new holding company which will hold both of these companies. Given the ROE compliances for overseas companies, the shareholders are considering winding up their overseas companies and handling all UK operations from UK companies.

Tax Implications of the Transaction

Whenever a property is transferred between individuals or companies, there are two primary tax considerations, i.e. CGT for the transferor and SDLT for the transferee. If these properties are transferred to a UK company without any reliefs, the following tax implications will arise:

When an overseas company transfers its UK Property, the resulting gain is subject to Corporation Tax (CT) at 25%. Chargeable gains are calculated based on the difference between the disposal proceeds and the original cost, adjusted by indexation allowance up to 31 December 2017 for companies. As a non-UK resident, the company will have three different methods to calculate the chargeable gains and choose the ones that result in the lowest gain. We have only taken two methods as the retrospective method resulted in highest gain for the DCFC Ltd. The chargeable gains is calculated as follows:

Rebasing Method

Indexation Factor from rebasing from 5 April 2015 to 31 December 2017

Straight-Line Apportionment Method

Indexation Factor from rebasing from the purchase date to 31 December 2017

For LRS Holding Co

Indexation Factor from rebasing from 5 April 2015 to 31 December 2017

Therefore, the total corporation tax on chargeable gains on the transfer of UK Properties to the UK company will result in total tax liability of £99,620 (65,250+34,370).

SDLT is payable on the acquisition of UK land or property, and the amount due depends on the nature of the property and the identity of the acquiring party. While SDLT is generally calculated based on the chargeable consideration paid (typically cash), different rules apply where the buyer and seller are connected, and the acquirer is a company.

Under Finance Act 2003, Schedule 4, Paragraph 1, if the buyer and seller are connected persons, whether individuals or companies, the SDLT must be calculated based on the market value of the property, regardless of the actual amount paid.

In this case, the acquiring entity is a UK company, and the sellers are two offshore companies that are both ultimately controlled by the same shareholders. As such, they are deemed to be connected persons under section 1122 of the Corporation Tax Act 2010, and the market value rule applies for SDLT purposes.

Because the four properties are being transferred from companies under common ownership as part of a single arrangement, Finance Act 2003, Section 108 treats the acquisitions as linked transactions. Consequently, the total consideration across all four properties is combined when applying the SDLT rates, resulting in the SDLT payable of £273,760, calculated as follows:

If the above transactions are executed within a qualifying UK corporate group, significant tax reliefs are available:

• No SDLT is payable under Schedule 7 of the Finance Act 2003, which provides group relief for property transfers between companies within the same 75% group.
• No gain/no loss treatment applies under section 171 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992), meaning any gains on the transfer of assets between group companies are deferred until the asset is eventually sold outside the group.

As a result of the reliefs:

Clawbacks of the Relief

While transactions between group structure may qualify for Corporation Tax on Chargeable Gains and SDLT reliefs, these are not unconditional. Both reliefs are subject to clawback provisions if certain conditions are triggered after the transaction.

Under the no gain/no loss rule, assets transferred between companies within the same group are not subject to immediate CGT. However, this relief can be clawed back if, within six years of the transfer, the transferee company:

1. Leaves the group (triggering a de-grouping charge);
2. Becomes an investment trust; or
3. Becomes a venture capital trust.

The clawback is applied by treating the company as if it had disposed of and immediately reacquired the asset at market value on the date it originally acquired it. Importantly, the asset must still be held by the company for the charge to arise.

Accordingly, if the UK Holding Company exits the group within six years of acquiring the asset, a de-grouping charge will arise.

Similarly, SDLT group relief can be withdrawn if the purchasing company ceases to be a member of the same group as the transferor within three years of the effective date of the transaction. In such cases, the purchaser must submit an SDLT return and pay the tax that was originally relieved.

However, the SDLT clawback does not apply if the group relationship ends as a result of steps taken in the course of winding up the vendor or any company above it in the group hierarchy. This means that DCFC Ltd and LRS Holding Co may be wound up after transferring the properties to the UK Holding company.

Even if the group relationship ends after the three-year period, the purchaser must still consider whether there were arrangements in place during that period that anticipated or planned for the cessation. HMRC may still treat the relief as withdrawn if the disposal aligns with arrangements made within the three-year window—even if executed shortly thereafter.

Formation of the Group Structure

It may be tempting to share the transfer in the companies solely to take benefits of these reliefs. However, it comes with a cost. The first thought that might strike one’s mind to establish the group structure may be to create a holding company in the UK, and sell the shares in the overseas company to that company. However, it would result in the following tax implications:

Since 6 April 2019, non-UK residents who dispose of shares in a company deriving at least 75% of its value from UK land, and in which they hold at least a 25% interest, are subject to UK Capital Gains Tax. Such disposals are treated as indirect disposals of UK property.

In this case, both companies in question are considered UK land-rich, almost all of their value is attributable to UK land. Additionally, each shareholder holds more than 25% of the shares in both companies. As a result, the sale of these shares falls within the scope of the UK’s indirect disposal rules and is therefore chargeable to UK NGCGT.

Under these rules, shareholders may choose to calculate the gain using either the original acquisition cost of the shares or the market value as at 6 April 2019, which is the date from which indirect disposals of UK property by non-residents became chargeable to UK tax.

The shareholders have over £60K UK income, so the applicable CGT rate for the total gain is 24%.

Valuation of Shares

NRCGT Calculation (Per Shareholder)

For two shareholders, the total CGT liability will be £166,560.

The party acquiring the shares will be subject to Stamp Duty at 0.5% on the chargeable consideration. If the consideration is equal to the combined market value of the shares in both companies—£1,650,000—the UK holding company may be liable to pay Stamp Duty of £8,250 (i.e. 0.5% of £1,650,000).

The total cost of forming the group structure in the traditional method is £174,810.

Share for Share Exchange

If the proposed transactions are structured as a valid share for share exchange, the immediate tax cost of establishing the new structure, estimated at £174,810, can be avoided. Provided the shareholders can demonstrate that the arrangement is based on genuine commercial reasons, the transfer of shares to the newly formed UK holding company (HoldCo) will not give rise to an immediate tax charge.

Conclusion

This case highlights how a carefully structured share for share exchange can transform a costly offshore setup into a streamlined UK group, unlocking over £370,000 in tax savings. By demonstrating genuine commercial reasons and securing HMRC clearance, the shareholders avoided immediate CGT and SDLT charges. While group reliefs offer substantial benefits, they come with conditions—making advance planning and compliance essential. With the right strategy, restructuring can achieve both tax efficiency and operational simplicity.