Put a new holding company in place, usually without a tax charge.

A holding company insertion puts a new company on top of an existing company. The shareholders transfer their shares in the existing company to the new holding company, and in return the holding company issues its own shares to them. Afterwards the shareholders own the holding company, and the holding company owns the original company. Where the conditions are met, this can be done without a capital gains tax charge for the shareholders.

Many demergers, particularly capital reduction demergers, start with a new holding company. The new company has share capital reflecting the value of the group, which can then be reduced to support the separation, and the original trading company does not need to change its own capital. It also creates a clean top company from which businesses or property can be split off. The insertion and the demerger are planned and usually cleared together.

A holding company can give flexibility before a sale. Surplus cash or property can sometimes be moved up to the holding company, and the holding company can sell the trading subsidiary rather than the shareholders selling their shares. That can bring the substantial shareholding exemption into play for the company, where its conditions are met. Whether this is the best approach depends on what the shareholders want to do with the proceeds.

Not usually. Section 135 TCGA 1992 treats a qualifying exchange as a reorganisation, applying sections 127 to 131. Under section 127, the new holding company shares are treated as the same asset as the old shares, acquired when and for what the old shares were acquired. No gain arises on the exchange, and the gain is deferred until the shareholder later disposes of the new shares.

Section 135 applies where the acquiring company holds, or will hold as a result of the exchange, more than 25% of the ordinary share capital of the target, or the greater part of its voting power, or where shares are issued under a general offer made on condition that the acquirer will have control. In a holding company insertion, the new company normally acquires 100% of the existing company, so these tests are usually met.

Section 137 TCGA 1992 can deny share exchange relief where a main purpose of the arrangements is avoiding capital gains tax or corporation tax. Section 138 lets the companies ask HMRC in advance to confirm it is satisfied that this rule will not apply. Clearance must be obtained before the new shares are issued, and only the acquiring company or the target company can apply. HMRC must respond within 30 days of a complete application.

No. Section 138 clearance only deals with the anti-avoidance rule in section 137. HMRC's guidance makes clear that clearance does not mean the relieving sections will actually apply; the technical conditions of section 135 still have to be met, and all other tax aspects are dealt with in the normal way. Clearance also relies on full and accurate disclosure. That is why the facts, steps and reasons are set out carefully in the application.

The transfer of shares to the holding company is a transfer on sale, so stamp duty at 0.5% would normally be due on the value. Section 77 Finance Act 1986 gives relief where the holding company acquires the whole of the target's share capital for shares only, the new shares mirror the old shares in classes and proportions, the acquisition is for bona fide commercial reasons, and there are no disqualifying arrangements under section 77A.

For section 77 relief, the holding company's share capital must mirror the target's immediately after the exchange. The new shares must be of the same classes, each class must make up the same proportion of the total, and each shareholder must hold the same proportion of each class as before. Changing the share structure at the same time as inserting the holding company can break this rule, so any restructuring of share classes is usually done separately.

It can. Section 77A Finance Act 1986 denies section 77 relief where there are disqualifying arrangements, broadly arrangements whose purpose is for a person or persons to obtain control of the holding company. A planned demerger or sale can create that risk. For instruments executed from 22 July 2020, someone who has held at least 25% of the target for the previous three years is disregarded, which removes the problem in many owner-managed companies.

Yes. Relief under section 77 is not automatic. The stock transfer form or other transfer document is submitted to HMRC with a claim for relief and supporting information, so that HMRC can confirm the relief and the transfer can be registered. HMRC guidance says stock transfer forms should be sent within 30 days of being signed and dated. We prepare and submit the claim as part of the process.

Generally the new shares stand in the shoes of the old shares, so the period of ownership carries over. There is also an election under section 169Q TCGA 1992 to treat the exchange as a disposal so that business asset disposal relief can be claimed on it, which can occasionally help where the new company would not qualify. Whether either is helpful depends on the shareholder's plans, and the relief's own conditions still have to be met at the time of the eventual sale.

It can be. The transactions in securities rules can counteract an income tax advantage obtained in connection with transactions in securities, and a share exchange is one. For example, if the holding company later pays cash to shareholders, HMRC may consider whether income has been turned into capital. Clearance under section 701 ITA 2007 is usually sought alongside section 138, and both can be made in a single application to HMRC.

Yes, but the holding company usually needs to issue shares that mirror the existing classes, both for the capital gains tax analysis and for stamp duty relief under section 77. Shareholders' rights, such as dividend rights and voting, are normally reproduced in the new articles. If the classes are to be changed, that is best done as a separate step. Employee share options and shareholder agreements also need to be reviewed and replicated.

Often yes. A new holding company can trigger change of control clauses in loan agreements, leases, customer contracts and licences, even though the ultimate owners have not changed. Lenders frequently need to consent and may ask the holding company to give guarantees. Your lawyers should review the key contracts early, so the insertion does not cause an unexpected default or renegotiation that delays the wider demerger or sale.