Advanced Taxation (UK) · Capital gains tax: gains and losses on the disposal of shares and securities

Takeovers, Reconstructions and Share-for-Share Exchanges: CGT Treatment

Updated 11 October 2026 · Fact-checked

On a takeover where you swap your shares for shares in the bidder, no gain arises at that point. The new shares take over the old shares' cost and date. If you also get cash or loan notes, the cash is taxed now, based on a part disposal. Anti-avoidance can deny the relief.

Understand Takeovers, Reconstructions and Share-for-Share Exchanges

A share-for-share exchange happens when a company takes over another and shareholders receive new shares in the bidder in return for their old shares. Taxing a gain at that point would be harsh, because you have received no cash. So the law treats it as a continuation of your original holding.

The effect is a rollover. You are treated as not disposing of the old shares. The new shares are treated as acquired at the same time and for the same cost as the old shares. The gain is not lost. It is deferred until you sell the new shares.

A reconstruction or reorganisation works the same way. This covers a bonus issue, a rights issue, or a reorganisation of share capital where you receive new shares for old. The key point is that you keep the old cost and acquisition date. Where you take up a rights issue, you add the cost paid to the pool.

Things change when you receive something other than ordinary shares. Cash and loan notes are examined often. Cash is normally a part disposal and is taxed now, unless it is small. The small-amount rule comes from TCGA 1992 s122, which lets small cash be deducted from the cost of the new holding instead. HMRC practice treats cash as small if it is £3,000 or less, or 5% or less of the value of the holding. These limits are practice, not part of the tax tables, and the £3,000 is not the annual exempt amount. Always run the check and show it.

Loan notes depend on their type. If they are qualifying corporate bonds (QCBs), the gain on the old shares is calculated at the takeover date and deferred, then becomes chargeable when the QCBs are disposed of or redeemed. The deferred gain is taxed at the rates in force in the tax year of that disposal or redemption. If you claim business asset disposal relief, the qualifying conditions are tested at the date of the original share disposal, not at the later date. If the loan notes are not QCBs, they are treated as part of your new holding and rolled over. The old cost is split between the new shares and the loan notes by market value at the date of the exchange.

Relief applies only if two things are true. First, the exchange is for genuine commercial reasons and is not part of a scheme or arrangement where avoiding tax is one of the main purposes. Second, the bidder meets the share test. It must end up holding more than 25% of the target's ordinary share capital as a result of a general offer made to the members or any class of them, or have control of the target, including as a result of a general offer made on a condition that, if satisfied, gives the bidder control. Where the conditions are not met, the exchange is a disposal of the old shares. You are taxed on the actual consideration received, which is the value of the new shares plus any cash or loan notes. A clearance can be sought from HMRC in advance.

A QCB is a loan note that is a sterling debt, with no right to convert into shares or other securities, that is not redeemable in a foreign currency. A QCB is itself exempt from CGT on a disposal. That is why the gain on the old shares is calculated and frozen at the takeover date, but it is charged only when the QCB is disposed of or redeemed.

Key rules to remember

Share-for-share rollover: New shares: cost and acquisition date = old shares' cost and date; No disposal at the takeover date. Gain is deferred until the new shares are sold.
Part cash consideration (ordinary shares and cash): Cost allocated to cash = Total cost × cash ÷ (cash + market value of new shares); Gain on the cash part is taxed now. Remaining cost carries forward on the new shares. Small-amount rule: under TCGA 1992 s122, cash that is small compared with the value of the holding is deducted from the cost of the new shares instead of being taxed as a part disposal. HMRC practice treats cash as small if it is £3,000 or less, or 5% or less of the value of the holding (cash plus market value of the new shares). These limits are practice, not in the tax tables, and the £3,000 is not the annual exempt amount. Use the part disposal formula when the cash is above both limits, unless the question tells you otherwise.
Loan notes that are QCBs: Gain frozen = market value of QCBs − cost apportioned to the QCBs (by market value); Where the QCBs are the only consideration, the cost apportioned to them is the whole cost of the shares exchanged. With mixed consideration, apportion the cost between shares, QCBs and cash by market value first. The gain is chargeable when the QCBs are disposed of or redeemed, at the rates in force in the year of that disposal or redemption. Business asset disposal relief conditions are tested at the date of the original share disposal. The QCBs are themselves exempt from CGT when disposed of.
Loan notes that are not QCBs: Treated as part of the new holding: no disposal at takeover; The loan notes are rolled over with the new shares. The old cost is apportioned between the new shares and the loan notes by their market values at the date of the exchange. Each part keeps the old acquisition date.
CGT rates from the tax tables: 18% lower rate, 24% higher rate, annual exempt amount £3,000; Business asset disposal relief rate is 14% on a lifetime limit of £1,000,000. Investors' relief has the same rate and limit.

How to solve Takeovers, Reconstructions and Share-for-Share Exchanges questions

Use the same sequence for every takeover question. Work out what the shareholder receives, then decide how each part is taxed.

1List the consideration received: new ordinary shares, cash, loan notes, or a mix. Note market values at the takeover date.
2Check the conditions for relief. Is there a genuine commercial reason, with no main purpose of avoiding tax? Does the bidder end up with more than 25% of the target's ordinary share capital as a result of a general offer, or with control, including as a result of a general offer made on a condition that gives it control? If not, relief is denied and you tax a disposal of the old shares for the actual consideration received (new shares plus any cash or loan notes).
3Decide whether any loan notes are QCBs. Check for sterling denomination and no conversion rights.
4Compute the gain on any cash. Check first whether it is small under s122 and HMRC practice (£3,000 or less, or 5% or less of the value of the holding), and show the check. If it is not small, allocate the cost using the market value formula and deduct it from the cash received.
5For QCBs, calculate the frozen gain on the old shares at the takeover date and note when it will be charged. It is taxed at the rates in force in the year of disposal or redemption, with business asset disposal relief tested at the original share disposal date.
6Calculate the base cost and date of the new shares. Carry forward the old cost less any cost used for cash. Split it by market value if there are non-QCB loan notes.
7Apply the annual exempt amount, losses and rates, using business asset disposal relief or investors' relief where available.
8State the conclusion and the date the deferred gain will be taxed, with any planning point.

Quickest way: Three-way split under time pressure

When to use it: Use this when a question gives a mix of shares, cash and loan notes and you only have a few minutes.

Draw three boxes: new shares, cash, loan notes.
Shares or non-QCB loan notes: write 'rolled over'.
Cash: compute the part disposal now.
QCBs: compute the gain now, but mark it as deferred.
Add up gains charged now and gains deferred. Apply the annual exempt amount (£3,000) and the rate.

Common mistakes in Takeovers, Reconstructions and Share-for-Share Exchanges

Taxing the whole gain when only shares are received
Students treat a takeover as a sale of the old shares.
Fix: Check for new ordinary shares only. If there is no cash, there is no disposal and the cost and date are carried over.
Taxing the loan notes as if they were exempt now
Students mix up the exemption on QCBs with a deferral of the gain.
Fix: QCBs are exempt on their own disposal, but the gain on the old shares is calculated at takeover and charged when the QCBs are disposed of.
Using the wrong cost for the cash part
Students deduct the whole cost against the cash.
Fix: Use the market value fraction: cash ÷ (cash + market value of new shares) × total cost. First check whether the cash is small enough (£3,000 or less, or 5% or less of the holding) to be deducted from cost instead.
Ignoring the anti-avoidance and share test conditions
Students assume relief is automatic.
Fix: State the conditions and conclude whether they are met: genuine commercial reasons with no main purpose of avoiding tax, and either more than 25% of the target's ordinary share capital as a result of a general offer, or control as a result of an offer made on a condition that gives control. Mention clearance.
Resetting the acquisition date of the new shares
Students treat the new shares as bought on the takeover date.
Fix: The new shares take the old acquisition date. This matters for matching rules and for qualifying periods for business asset disposal relief.

Worked examples

Example 1

Anita bought 10,000 shares in Target Ltd for £20,000. Bidder plc acquires Target Ltd in a general offer. Anita receives 5,000 ordinary shares in Bidder plc, worth £45,000 in total, and £15,000 cash. Assume the relief conditions are met. Anita has no other gains, and has used her basic rate band. Compute the gain taxable on the takeover.

Show the solution

Total consideration = £45,000 + £15,000 = £60,000. This is the value of the holding.
Small-amount check: 5% × £60,000 = £3,000. The cash of £15,000 is more than £3,000 and more than 5% of the holding (it is 25%), so it is not small. The part disposal formula applies.
Cost allocated to cash = £20,000 × £15,000 ÷ £60,000 = £5,000.
Gain on cash part = £15,000 − £5,000 = £10,000.
Annual exempt amount = £3,000, so taxable gain = £7,000.
Tax at 24% (higher rate) = £1,680.
Cost of the Bidder plc shares = £20,000 − £5,000 = £15,000, with the original acquisition date.

Answer: The cash is not small, so there is a part disposal. Chargeable gain now is £10,000, £7,000 after the annual exempt amount, giving CGT of £1,680 at 24%. The Bidder plc shares carry a base cost of £15,000.

Example 2

Ben bought 8,000 shares in Small Ltd for £12,000. In a takeover by Large plc, he receives loan notes worth £30,000 only. The loan notes are sterling-denominated with no conversion rights. Explain the CGT treatment and compute the gain, assuming relief conditions are met.

Show the solution

Check the loan notes. Sterling, with no conversion rights: they are QCBs.
The gain on the old shares is calculated at takeover: £30,000 − £12,000 = £18,000.
This gain is not taxed at takeover. It is frozen and deferred.
The gain becomes chargeable when Ben disposes of or redeems the QCBs. It is taxed at the rates in force in that year.
If business asset disposal relief is claimed, its conditions are tested at the date of the original share disposal.
The QCBs are themselves exempt from CGT on disposal, so no further gain or loss arises on them.

Answer: There is no CGT on the takeover. A frozen gain of £18,000 is chargeable when the QCBs are disposed of or redeemed, at the rates and annual exempt amount that apply in that year.

Exam tips

Always state the conditions for relief first. Marks are awarded for noting the commercial reasons test and the control or 25% test under a general offer.
Use the market value formula for cash and show each figure. Method marks are easy to earn.
If loan notes appear, look for sterling denomination and conversion rights, and say whether they are QCBs.
Show the base cost and acquisition date of the new shares in the final line. This links to later disposals.
Where the shareholder is a director or owner-manager, link the answer to business asset disposal relief, noting that the 14% rate applies up to the £1,000,000 lifetime limit.

Practice questions from Capital gains tax: gains and losses on the disposal of shares and securities

Takeovers, Reconstructions and Share-for-Share Exchanges in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Applied SkillsTakeovers and Reorganisations of Share Capital

Takeovers, Reconstructions and Share-for-Share Exchanges: frequently asked questions

Is there CGT on a share-for-share exchange?

Not at the time of exchange if you receive only new ordinary shares and the conditions are met. The new shares take the old cost and date, so the gain is deferred until you sell.

How is cash received in a takeover taxed?

Cash is a part disposal. You allocate part of your cost to the cash using the market value fraction and tax the gain now. The rest of the cost rolls into the new shares.

What is the difference between QCBs and other loan notes?

QCBs are exempt from CGT on disposal, so the gain on the old shares is frozen at takeover and charged when the QCBs are disposed of. Other loan notes are treated like shares and rolled over.

Can HMRC deny share-for-share relief?

Yes. Relief does not apply where the exchange is not for genuine commercial reasons or is aimed at avoiding tax. You can ask HMRC for clearance in advance if the position is uncertain.