The ‘whole or main purpose’ test in relation to share exchange: recent case law

When companies are sold part of the consideration is often in the form of shares or debentures issued by the buyer company. This is referred to as a ‘share exchange’ as the vendor is selling their shares to the buyer in exchange for an issue of either shares or debentures by the buyer. Generally speaking this element of the transaction is treated as a non-event for the purposes of the tax on chargeable gains with any tax liabilities accruing instead on the eventual disposal of the newly issued shares or debentures such as on redemption of the debentures. In many cases this represents simply a deferral of the tax charge but as we will see when discussing two recent decisions under certain circumstances the share exchange rules lead to an absolute tax saving.

These rules apply so long as the...