Advanced Taxation (UK) · Corporation tax: chargeable gains for companies

Reorganisations, Reconstructions and Share-for-Share Exchanges for Companies

Updated 11 October 2026

A reorganisation, reconstruction or share-for-share exchange lets a company shareholder treat new shares as the same asset as the old ones. No disposal arises, so no gain is charged. The original cost carries into the new shares. Any cash received is a part disposal. Gain arises only when the new shares are sold.

Understand Reorganisations, Reconstructions and Share-for-Share Exchanges

Normally, swapping one asset for another is a disposal. The company shareholder would be taxed on the gain at once, even though it received no cash. That would be unfair in a takeover or restructure where the investor simply holds a different piece of paper.

The reorganisation rules remove that charge. The old shares and the new shares are treated as the same asset, acquired when and at the cost of the old shares. The gain is not lost. It is deferred until the new shares are sold.

Two situations are covered. A reorganisation is a change to a company's own share capital, such as a bonus issue, a rights issue or a conversion of shares into another class. A share-for-share exchange (a reconstruction involving a share exchange) is where a company issues shares or debentures in exchange for shares in another company. A takeover where target shareholders receive shares in the bidder is the usual example.

Bonus issues and rights issues are dealt with under the share pooling rules. The new shares join the existing pool at the original acquisition date. A bonus issue adds no cost. For a rights issue, the amount paid is added to the pool cost.

For the exchange rule to apply, one of these must be true:

The bidder holds, or as a result of the exchange will hold, more than 25% of the target's ordinary share capital.
The bidder holds, or will hold, the majority of the voting power in the target.
The bidder acquires the shares under a general offer made to the target's shareholders, on a condition that, if met, gives the bidder control.

There must also be a genuine commercial purpose. The deal must not have tax avoidance as one of its main purposes. Advance clearance from HMRC is optional. It is not a condition of the relief, but it gives certainty.

If the shareholder also receives cash, that part is a disposal. The shareholder is taxed on a gain computed on a part-disposal basis, using the market value of the new shares and the cash received. Where the cash is small compared with the value of the old shares, a different treatment may apply. The cash may be deducted from the base cost instead of being taxed as a part disposal. The question will tell you if you need this.

If the shareholder receives qualifying corporate bonds (QCBs), these are not treated as the same asset as the old shares. The gain linked to the QCBs is worked out at the date of the exchange, but it is not taxed then. It is deferred until the QCBs are disposed of or redeemed. Loan notes that are not QCBs are treated like the new shares and fall within the same-asset rule.

Where you see a company shareholder in a takeover, think first of whether the substantial shareholding exemption might also apply, as it can remove the gain altogether.

Key rules to remember

Share-for-share exchange treatment: New shares = same asset as old shares; cost and acquisition date carry over; No disposal at the time of the exchange, so no gain or loss arises.
Part disposal where cash is also received: Cost allocated = Total cost × A ÷ (A + B); A = cash received. B = market value of the new shares at the exchange date. Gain = A − cost allocated. If the cash is small, the cash may instead be deducted from the base cost, so check what the question says. The same apportionment finds the gain linked to any QCBs, but that gain is deferred until the QCBs are disposed of.
Cost of new shares after a cash receipt: Base cost of new shares = Total cost − cost allocated to the part disposal; Use this base cost when the new shares are sold later.
Gain on later sale of new shares: Gain = Sale proceeds − remaining base cost; For a company, corporation tax applies to the gain. Rates are in the tax tables, and the 18% and 24% rates are for individuals only.
Bonus issue and rights issue: Bonus: no new cost, pool grows in number only. Rights: add cost paid to the pool; Both are covered by the share pooling rules, not the share-for-share exchange rule. The new shares join the existing holding at the original acquisition date. For a rights issue, the amount paid is added to the pool cost.

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

Use this method for any exam question on takeovers and reorganisations involving a corporate shareholder.

1Identify the event: bonus or rights issue, takeover for shares, or takeover with part cash.
2Check that the conditions for share-for-share treatment are met: control or general offer, commercial purpose and no main tax avoidance purpose.
3Confirm whether the substantial shareholding exemption applies to the shareholder, as it may remove the gain entirely.
4If shares only are received, state that there is no disposal and the cost and date carry over to the new shares.
5If cash is also received, find market value of the new shares at the exchange date and compute the part disposal using A ÷ (A + B).
6Compute the gain on the part disposal and the remaining base cost of the new shares.
7Work out the corporation tax at the rate you are given or are told applies, and say when any deferred gain will come into charge.
8Comment on the tax effects for the shareholder and any advice, such as seeking advance clearance.

Quickest way: Quick test: shares only or shares plus cash

When to use it: Use this when a question gives you a takeover and asks for the shareholder's gain.

Shares only: write that no gain arises and the cost carries over. Stop.
Shares plus cash: set A = cash and B = market value of new shares.
Cost used = total cost × A ÷ (A + B). Gain = A − cost used.
Remaining cost = total cost − cost used.
Always add a line on the substantial shareholding exemption and clearance.

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

Charging a gain when only shares are received.
Students treat a swap as a normal disposal.
Fix: Say the old and new shares are the same asset, so there is no disposal at the exchange.
Using the cash received as B in the part disposal formula.
The letters A and B are mixed up.
Fix: A is the cash. B is the market value of the new shares after the exchange. Label them in your workings.
Forgetting to reduce the base cost of the new shares after a part disposal.
Students stop after finding the gain.
Fix: Always show the remaining cost as total cost less cost allocated to the part disposal.
Ignoring the conditions for the relief, such as control and the commercial purpose test.
Students learn the effect but not the entry rules.
Fix: Start your answer by stating the conditions and checking them against the facts.
Using the individual CGT rates of 18% and 24% for a company.
Mixing up personal and company gains.
Fix: A company pays corporation tax on its chargeable gain. Use the corporation tax rate for its profit level. Do not use the annual exempt amount either, as companies do not get it.
Missing the substantial shareholding exemption.
Students jump straight into the reorganisation rules.
Fix: Check the exemption first. It needs at least 10% of the ordinary shares to be held for a continuous 12 months in the 6 years before the disposal. The company invested in must be a trading company or the holding company of a trading group or subgroup. Where the exemption applies, the gain on the disposal is exempt, including the part disposal on any cash received.

Worked examples

Example 1

Alpha Ltd bought 10,000 shares in Beta Ltd for £40,000 after 31 December 2017, so no indexation allowance is due. Gamma plc takes over Beta in a share-for-share exchange that meets the conditions. Alpha receives 5,000 Gamma plc shares worth £70,000 in total. Later Alpha sells these for £90,000. Assume the substantial shareholding exemption does not apply. Compute the gain on the exchange and the later gain.

Show the solution

The exchange is a share-for-share exchange where the conditions are met.
The Gamma plc shares are treated as the same asset as the Beta shares.
No disposal arises at the exchange, so the gain is £nil.
Base cost of the Gamma shares is £40,000 and the acquisition date is that of the Beta shares.
The Beta shares were acquired after 31 December 2017, so there is no indexation allowance.
On the later sale: proceeds £90,000 less cost £40,000 = £50,000.

Answer: No gain arises on the exchange. The later chargeable gain is £50,000, chargeable to corporation tax.

Example 2

Delta Ltd bought 20,000 shares in Echo Ltd for £60,000 after 31 December 2017, so no indexation allowance is due. Foxtrot plc takes over Echo in a qualifying exchange. Delta receives new Foxtrot shares worth £90,000 and cash of £30,000. Assume the substantial shareholding exemption does not apply. Compute the gain on the part disposal and the base cost of the new shares.

Show the solution

A = cash received = £30,000.
B = market value of new shares = £90,000.
A + B = £120,000.
Cost allocated = £60,000 × 30,000 ÷ 120,000 = £15,000.
Gain = £30,000 − £15,000 = £15,000.
Remaining base cost of Foxtrot shares = £60,000 − £15,000 = £45,000.

Answer: The part disposal gives a gain of £15,000, chargeable to corporation tax. The new shares have a base cost of £45,000, and the rest of the gain is deferred.

Exam tips

State the conditions for the relief in your first lines. Marks are often given for this, not just the numbers.
Label A and B clearly in every part disposal calculation.
Mention the substantial shareholding exemption and advance clearance as commercial points. They earn professional skills marks.
If the question gives a rate or a corporation tax computation, use only the rates in the tax tables and do not invent any.
Close with a short note on when the deferred gain will arise, as this shows you understand the purpose of the relief.

Practice questions from Corporation tax: chargeable gains for companies

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

Is a share-for-share exchange taxable for a company?

Not at the time of the exchange if the conditions are met. The new shares take the cost and date of the old shares. The gain is deferred until the new shares are sold.

What happens if I receive cash as well as shares?

The cash is a part disposal. You use the formula A ÷ (A + B) to find the cost that matches it, then tax the resulting gain. The remaining cost passes to the new shares.

Does the annual exempt amount apply to a company?

No. The £3,000 annual exempt amount in the tax tables is for individuals. A company pays corporation tax on its chargeable gains.

Do I still need to consider the substantial shareholding exemption?

Yes. If it applies to the shareholding, the gain on any disposal, including a cash part, may be exempt. Check it before you do the reorganisation workings.