We advise founders on the transfer of trading company shares by way of share-for-share exchange into a family investment company (“FIC”), followed by a later sale of the trading company shares. This allows for the tax-free sale of the trading company shares due to the substantial shareholding exemption for corporation tax, with the proceeds of sale invested within a FIC.
Establishing a FIC: The founder sets up a FIC, structured such that the founder retains control but economic value mostly lies with the next generation. To find out more, please click here.
Share-for-share exchange: The founder then transfers his shares in the trading company to the FIC, in exchange for the issue of shares to him in the FIC. Under section 135 Taxation of Chargeable Gains Act 1992 (“TCGA 1992”), the shares in the FIC stand for tax purposes in the shoes of the original shares in the trading company. No chargeable gain arises at this point. The gain would come into charge on a later disposal of the FIC shares. Where the relevant conditions in section 77 Finance Act 1986 are met, relief from stamp duty applies on the share for share exchange.
The FIC later sells the shares in the trading company to a third-party buyer: If the conditions of the substantial shareholdings exemption (SSE) under Schedule 7AC TCGA 1992 are met, the gain is wholly exempt from corporation tax. The FIC must hold the trading company shares for at least 12 continuous months prior to the share sale; where section 135 TCGA treatment applies, the period pre share-for-share can be taken into account within the 12-month period. So, if the founder holds the original company’s shares for 6 months, exchanges them under section 135 TCGA, and then holds the acquiring company’s shares for another 6 months, the total aggregated holding period reaches the 12-month statutory threshold required for the SSE to apply.
The company whose shares are sold must be a trading company or holding company of a trading group throughout the period. Significant cash holdings can prevent the availability of the relief. The exemption applies automatically without a formal claim.
There is an anti-avoidance rule designed to deny the SSE if a main purpose of the arrangement is to secure a tax advantage rather than to conduct genuine commercial activity.
Since April 2017, there is no longer a requirement that the investing company is a trading company or a member of a trading group. This means that family investment companies (which are not trading companies) can now access the SSE, which they were unable to before April 2017.
Finance Act 2026 Changes
The rules on share-for-share exchanges have recently been tightened. Before 26 November 2025, a share-for-share exchange qualified for tax-neutral treatment provided there were bona fide commercial reasons and the arrangements were not designed mainly to avoid CGT or corporation tax. The Finance Act 2026 has however rewritten the test. HMRC can now deny relief where the main purpose, or even one of the main purposes of the arrangements is to reduce or avoid a capital gains liability.
This is a direct response to the Court of Appeal’s decision in Delinian Ltd v HMRC [2023] EWCA Civ 1281 (the “Euromoney” case), and it brings the legislation into line with HMRC’s long-held view of how these provisions should bite.
Importantly, HMRC accepts that deferral alone does not count as a tax advantage for these purposes — after all, deferral is precisely what section 135 TCGA is designed to achieve. The target is arrangements that reduce or eliminate a charge altogether, rather than simply pushing it down the road.
Where the test is failed, HMRC can now make just and reasonable adjustments to counteract the tax advantage. In practice, this gives HMRC a flexible tool to unpick arrangements it considers abusive — so structuring needs to be watertight.
Any share-for-share exchange with a value-shifting, loss-creation, or base-cost uplift element should be reviewed carefully against the new rules. If you are planning a reorganisation or acquisition involving share exchanges, early tax advice is essential
Conclusion
With careful structuring around the anti-avoidance rules, it remains possible to benefit from the interaction between the share for share exchange rules with the SEE so as to exit from the business tax-free.
