A merger typically involves companies or groups transferring the shares in one or more subsidiaries to another company in exchange for shares. Groups making disposals of subsidiaries are eligible for the Substantial Shareholding Exemption (SSE) on capital gains arising from the transfer of shares, provided the following conditions are fulfilled:

Substantial Shareholding

The investing company must hold at least 10% of the target company’s ordinary share capital and must be beneficially entitled to at least 10% of the profits available to equity holders and 10% of assets available to equity holders upon the winding up of the company.

Minimum Holding Period

The investing company must have held the minimum number of shares throughout a continuous 12-month period beginning not more than 6 years before the disposal takes place.

Target Company

The target company must be a trading company or the holding company of a trading group, and the condition must be met throughout the minimum holding period and up to the point of disposal.

Trading Activities

There should not be substantial extent of activities other than trading activities, and this is defined to mean not more than 20% of the company’s activities. This can be measured in relation to the company’s assets, its income or expenditure in terms of time spent on non-trading activities.

If the Substantial Shareholding Exemption (SSE) cannot be applied, a rollover relief may be available for share-for-share exchanges (see ‘Share Takeover’ below).

The transfer of such shares is, however, likely to be subject to stamp duty.

Exemption for Companies owned by Qualifying Institutional Investors

Effective 1 April 2017, the government has broadened the Substantial Shareholding Exemption (SSE) to also cover gains from sale of a substantial shareholding in any company (whether trading or not), provided that immediately before the disposal, at least 80% of the ordinary share capital of the disposing company is owned directly or indirectly by “qualifying institutional investors”.

Where the percentage is at least 25%, but less than 80%, then the amount of the chargeable gain (or allowable loss) arising is reduced by the proportion held by qualifying institutional investors.

The exemption is available to the qualifying institutional investors with shareholding of less than 10% in the target company, provided the acquisition cost of such shareholding is at least GBP 50 million.

Share Takeover

In situations where the consideration for the target company is by way of an issue of shares in the transferor company, shareholders in the target company are entitled to rollover relief. With the rollover relief, the shares received in the transferor company are treated as the same asset as the original shares, and the shareholders of the target will not be treated as having made a disposal and are not subject to capital gains tax. However, where a subsidiary company leaves a chargeable gains group, under an anti-avoidance rule, a 'de-grouping' charge applies if the transferee company leaves the group within 6 years.

There must be a holding of more than 25% of the transferee company’s shares of any class, and the transaction must be made for bona fide commercial reasons in order for the exemption to apply.

A merger or takeover through a share for share exchange is subject to stamp duty at 0.5% of the value of the shares issued on exchange.

Loan Notes Takeovers

It is common for takeovers to be effected partly by cash, with the remainder through loan notes. Loan notes are a form of deferred payment used which are redeemable at a future date for the remaining proceeds.

Cash considerations received are treated as a chargeable gain for shareholders, and as such, it might be desirable to structure the transaction in a way that a large proportion of the consideration is satisfied through the issuance of loan notes, which are eligible for claiming the rollover relief (see ‘Share Takeover’ above)

It is also worth noting that there is a distinction between the tax treatment of Qualifying Corporate Bonds (“QCB”) and non-QCBs. Where the loan notes are QCBs, the seller’s shareholder gain is frozen and held over until the disposal of the loan note.

Takeovers by Scheme of Arrangement

A takeover by scheme of arrangement is a statutory procedure whereby a company makes an arrangement with its creditors. These schemes are also used to effect mergers when a new holding company is established. A scheme of arrangement is required to be approved by the court as well as by at least 75% of the target company’s shareholders.

A takeover or merger by scheme of arrangement can be effected through a transfer of shares. Under the transfer scheme, the shares in the target company are transferred to the bidder as consideration for the issue of shares, loan notes or the payment of cash by the bidder for the target’s shares.

Effective 4 March 2015, a company takeover may no longer be effected through a cancelation scheme of arrangement. Instead, companies effecting a takeover or merger must now use a transfer scheme of arrangement or a contractual offer, on which stamp tax on shares is payable (0.5%).

Rollover relief (see ‘Share Takeover’ above) on chargeable gains is available for shareholders involved in a scheme of arrangement. There may be cases where it is necessary to have a part cancellation and part transfer scheme, such as where a loan note alternative is offered for cash, a transfer scheme may be necessary for the loan note rollover. Additionally, it may be necessary to structure the target shares into separate classes to ensure that the entitlement of the relevant shareholders to acquire the shares in the bidder is the same as any person holding such shares.

Debt Restructuring

Debt restructuring can involve the conversion of debt to equity, debt cancellations or debt buy-back, and the treatment of these transactions is governed by the loan relationship rules.

Debt to Equity Conversions

Although the issuance of shares to satisfy debt is a common restructuring tool, under the loan relationship rules, it is taxable. However, if the amortised costs basis of accounting is followed, as is the case with most companies, and the release of the debt is in consideration for the issuance of shares which form part of the ordinary share capital of the company, a rollover relief is available (see ‘Share Takeover’ above).

As such shares may not have the same rights as the existing shares and can be given economic rights reflecting the agreement with the creditors, this could potentially cause tax de-grouping issues if the debt is in a subsidiary company. In such cases, intra-group restructuring issues should be carefully considered so that the parent company ultimately issues the shares.

Debt Cancellations

A debt cancellation generally results in a taxable credit from the debtor company, which applies generally to loan relationships and also to trade debts. There are reliefs for companies under the formal insolvency process, but not for companies under normal trading conditions.

Debt Buyback

Debt buyback is a common restructuring tool where the company repurchases some or all of its debt at a discount. A buyback at a discount is accorded the same treatment as a cancellation, where the release gives rise to a taxable credit.

There are limited exceptions to the rule, described as “corporate rescue” which applies where:

The debt has been acquired under arm’s length terms;
There is a change in ownership of the debtor company in the period beginning one year before and ending 60 days before the debt buyback;
If not for the change in ownership, it is reasonable to assume that the debtor company would in twelve months, have been in insolvent liquidation; and
If not for the change in ownership, the debt buyback would not have been made.

Limited exceptions also apply for debt-for-debt swaps (where the value is the same) and debt-for-equity transactions (see above).

Equity Restructuring

Funds can be raised through share issues, either through a rights issue, an open offer, a placing or a combination of methods. Broadly, the issuance of shares is not a disposal for capital gains purposes and does not constitute a distribution for tax purposes.

In relation to rights issues, the acquisition of a rights issue does not constitute a taxable distribution in the hands of the shareholder, as it brings the shareholder within the capital gains tax share reorganization rules. The aggregate of the existing shares and the shares acquired in the rights issue will be treated as the same asset and acquired at the same time as the original shares. The consideration paid for the new shares will be added to the base cost, and indexation of the new shares acquired will run from the date of the payment.

Stamp duty liability does not arise if bearer shares are not issued and the shares are not issued into a depositary or clearance system. Any subsequent disposal of the new holdings will give rise to stamp duty.

Where the option for the rights is sold, this is deemed a capital distribution which is subject to tax. The disposal of the rights will constitute a disposal of the original holding unless the amount is small – this is defined as 5% of the value of the shareholding or less than GBP 3,000.

As rights issues also frequently give rise to fractional entitlements, the sale of these fractional entitlements also constitute a capital distribution, which is likely to be small. The amount of the fractional entitlement will be deducted from the carried-forward base of the new holding.

Open Offers

Open offers of new shares to existing shareholders are unlikely to qualify as a re-organisation but HMRC will treat it as a reorganization in the same way as a rights issue to the extent that the shareholder acquires the shares up to his pro-rata share of the shares on offer. Shares over and above the pro-rata share will be treated as normal acquisitions and taxed accordingly.

Placing of Shares

Where shares are issued to certain subscribers without being offered pro-rata to existing shareholders, this is treated as an acquisition of new holdings by the place.

Cash Box Structures

A cash box structure is used to enable a UK PLC to raise capital without first making a formal pre-emptive offer to existing shareholders.

In order to do this, a wholly owned Jersey company is first set up by UK PLC. The said Jersey company will be tax resident of UK. The Jersey company will issue redeemable preference shares for cash to a manager generally an investment bank. The UK PLC will then issue fresh equity shares to the manager in return for non-cash consideration i.e., the redeemable preference shares of Jersey Company. The Jersey Company will then redeem the preference shares held by UK PLC by payment of cash to UK PLC, after which Jersey company will be wounded up.

This whole process for raising capital is done to avoid seeking shareholder approval to disapply the pre-emption rights or conducting a pre-emptive issue.

Since the Jersey company is non-resident in Jersey for tax purposes, the whole transaction is tax neutral from a Jersey perspective as there is no capital gains tax, corporation tax, stamp duty, VAT or withholding tax payable in Jersey in respect of the issue, transfer or redemption of shares in the Jersey company.

Also, since the register of members is kept in Jersey and stock transfer forms are executed in Jersey, no UK stamp duty applies on the transfer of shares.

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