Corporate Restructuring: Part 1, Reorganisations of Share Capital
A corporate restructuring takes place where a company and/or a group of companies undergo a process of reorganising the ownership structure for the benefit of the business.
Common reasons for a restructuring include a change of ownership, mergers (i.e. merging two or more separate companies into one), and demergers (i.e. the separation of a company into two or more smaller companies).
From a tax perspective, the term “reorganisation” is not defined in the legislation. However, it is accepted that it refers to a company organising its share capital in a different way.
Where the transactions in a reorganisation meet certain conditions for tax purposes, the reorganisation is not treated as involving a disposal of the original shares or an acquisition of new shares or debentures. Instead, the original shares and the new holding are treated as being the same asset for capital gains purposes, with the same acquisition date and cost as the original shares.
Common examples of share reorganisations include:
1. Subdivision/Consolidation of Share Capital
A subdivision of share capital involves a company splitting its shares into shares of a smaller nominal value. For example, subdividing 100 £1 shares into 1,000 £0.10 shares.
This may occur where the company wishes to introduce further shareholders without increasing the share capital or to enable shareholders to be awarded the correct number of shares to meet a required percentage holding (e.g. for Entrepreneurs’ Relief).
Likewise, consolidation of share capital involves a company exchanging existing shares for a fewer number of shares with an increased nominal value. For example, consolidating 10,000 £0.01 shares into 100 £1 shares.
2. Increases in Share Capital
An increase in share capital involves a company issuing new shares to its shareholders, including by way of a bonus or rights issue.
It is important that the allotment of new shares or securities is in proportion with the original holdings in order for the increase to be a reorganisation for tax purposes and qualify for relief.
Amy buys 10 £1 Ordinary Shares in a company for £1,000.
The company issues 4 £1 bonus shares for each 1 £1 Ordinary Share owned.
Therefore immediately following the bonus share issue, Amy will own 50 £1 Ordinary Shares
As Amy’s percentage holding both before and after the reorganisation is the same, this will likely be a reorganisation for tax purposes and the new holding will be treated as acquired at the same time and cost as the old holding.
3. Reduction of Share Capital
Subject to any restrictions or prohibitions in a company’s Articles of Association, a private company may reduce its share capital from, say, 100 £1 Ordinary Shares to 50 £1 Ordinary Shares.
A company may decide to reduce its share capital in order to create/increase distributable reserves or to eliminate accumulated losses.
It is important to note that not all reductions of share capital can be a reorganisation for tax purposes, namely paying-off redeemable share capital (unless on liquidation or where the redemption is via newly issued shares or debentures).
An alteration of share capital involves shares being converted from one class to another. This may occur where the shareholder would like to attach specific rights to a certain share class or as the first step of a more complex demerger.
Provided no value passes from one shareholder to another, this will likely be a reorganisation for tax purposes and will not be treated as a disposal of the old shares and an acquisition of the new shares.
Brian is the sole shareholder of a company which a) carries on a trade valued at £100,000; and b) lets out residential property as an investment activity valued at £100,000.
With a view to selling the trading business in the future, he converts his 100 Ordinary Shares into 50 A Ordinary Shares (with rights over the trading activities only) and 50 B Ordinary Shares (with rights over the investment activities only).
In Corporate Restructuring: Part 2, we will provide an introduction to the tax treatment of company mergers, demergers, and share-for-share exchanges.
Please note that this is a basic summary of share reorganisations only and does not constitute professional advice. If you have any questions about share reorganisations or corporate restructuring, please contact a member of our team.
An Introduction to UK Limited Companies (1 November 2018)
Company Demerger and Buy-Out (Case Study – 11 May 2018)
Statutory Demerger & Splitting a Company (Case Study – 29 November 2017)