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The Ultimate Guide to Share for Share Exchanges and HMRC Advance Clearance in the UK
When businesses restructure or grow through mergers and acquisitions, a common and powerful tool used is the share-for-share exchange. While this technique offers legitimate tax deferral opportunities, it comes with strict conditions and compliance expectations under UK tax law.
This guide gives you a complete understanding of the tax treatment, HMRC clearance process, and legal framework around share for share exchanges — specifically for those governed by English law and HMRC’s rules under TCGA 1992.
What Is a Share for Share Exchange?
A share for share exchange occurs when a shareholder exchanges shares they own in one company (Company A) for new shares in another company (Company B). This often happens in:
- Group reorganisations
- Setting up a new holding company
- Business acquisitions and takeovers
For example, if Company B wants to take control of Company A, it may offer shares in itself in exchange for Company A's shares. The original shareholders end up with shares in the new company — but without receiving cash.
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UK Tax Law: Section 135 TCGA 1992 Relief
Without relief, this exchange would normally trigger Capital Gains Tax (CGT), as shareholders are technically disposing of their old shares. However, Section 135 of the Taxation of Chargeable Gains Act 1992 provides relief:
"Where the exchange is made for bona fide commercial reasons and not for tax avoidance, the transaction is treated as a reorganisation rather than a disposal."
This means:
- No immediate CGT arises.
- The new shares in Company B are treated as having been acquired at the same time and for the same base cost as the original shares in Company A.
When Does Section 135 Relief Apply?
At least one of the following must apply:
- Company B holds or will hold more than 25% of the ordinary share capital of Company A
- Company B makes a general offer to all shareholders, gaining control
- Company B gains more than 50% of the voting power of Company A
Additionally, the transaction must be for genuine commercial purposes and not part of a tax-avoidance scheme.
HMRC Advance Clearance Under Section 138 TCGA 1992
To prevent tax uncertainty and demonstrate compliance with anti-avoidance rules, companies can apply for advance clearance from HMRC. While not mandatory, it is strongly recommended.
- Peace of mind before the transaction
- Prevents future disputes with HMRC
- Shows intention to operate within the law
- Applications must be submitted before the transaction takes place.
- Either the acquiring company or the target company can apply — not individual shareholders.
How to Apply for HMRC Clearance
HM Revenue & Customs, BAI Clearance, BX9 1JL
Send your joint clearance letter to: reconstructions@hmrc.gov.uk
Attachment size must not exceed 2MB.
Include this wording:
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.
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What Your Application Should Include
- Full description of the transaction
- Explanation of commercial reasons
- Names and shareholdings of affected shareholders
- Copies of draft agreements (if available)
- Timeline of the proposed transaction
- Statement of intention under Section 138 TCGA 1992
Common Mistakes and How to Avoid Them
❌ Incomplete disclosure: Failing to include relevant facts can void the clearance.
❌ Weak commercial reasoning: HMRC requires a strong business-led rationale. Personal shareholder benefits alone are not enough.
- Group simplification
- Preparing for sale of a subsidiary
- Asset protection
- Attracting investment
- Tax minimisation
- “Future flexibility” with no substance
- Transactions circular in nature
What If HMRC Refuses Clearance?
If clearance is refused, you can escalate the matter to the First-tier Tribunal under Section 138(4) TCGA 1992. This can be done within 30 days of refusal or expiry of HMRC’s 30-day window.
The tribunal will assess whether the transaction genuinely meets the legal requirements — and their decision overrides HMRC’s initial response.
Can You Still Proceed Without Clearance?
Yes, but with risk. HMRC’s refusal doesn’t make the transaction illegal — it just means you proceed without protection. If challenged later, you’ll need to prove the transaction qualified for relief.
Professional advice is essential if you choose this route.
Case Law: Clark & Brebner Influence
Cases like Clark v IRC and Brebner v IRC support the idea that tax advantages do not disqualify a transaction if the primary motive is commercial.
Despite this, HMRC now takes a stricter stance, especially where restructuring clearly benefits shareholders personally more than the business.
Final Thoughts: Get It Right First Time
A well-structured share for share exchange can provide immense strategic value without incurring an immediate tax bill — but only if all conditions are met and HMRC clearance is handled properly.
To improve your chances of success:
- Ensure a clear commercial rationale
- Disclose all material facts
- Submit early
- Be prepared to escalate if needed
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