What is a qualifying exchange of shares under the EMI code?

A qualifying exchange of shares occurs when a new company acquires all shares in an old company, with consideration consisting entirely of newly issued shares in the new company. This allows EMI option arrangements to continue seamlessly through a corporate restructuring, provided the exchange meets specific statutory conditions under ITEPA 2003 Schedule 5 paragraph 40.

What conditions must be met for a share exchange to qualify under paragraph 40?

The new company must issue shares as sole consideration. At the time of issue, it must have no other shares apart from subscriber shares and shares already issued in the same exchange. Each class of new shares must correspond exactly to the class and rights of old shares and be issued proportionally to existing holders.

How does capital gains tax apply to a qualifying exchange of shares?

The exchange must fall within the CGT reorganisation provisions under section 127 of the Taxation of Chargeable Gains Act 1992, as applied by section 135(3). This means the exchange is not treated as a disposal of old shares or an acquisition of new shares for capital gains tax purposes. The new shares step into the shoes of the old shares.

What does 'corresponding description' mean for old and new shares in a qualifying exchange?

Old and new shares are of a corresponding description if, assuming they were shares in the same company, they would be of the same class and carry the same rights. The term 'shares' includes securities except where 'subscriber shares' is used. This ensures a genuine like-for-like swap preserving all shareholders' relative positions.

Income Tax (Earnings and Pensions) Act 2003 Schedule 5 paragraph 40

Meaning of "qualifying exchange of shares"

Paragraph 40 defines what constitutes a "qualifying exchange of shares" for the purposes of the Enterprise Management Incentives (EMI) code, setting out the conditions that must be met for a share-for-share exchange to qualify.

A qualifying exchange occurs when a new company acquires all the shares in an old company, with the consideration consisting entirely of newly issued shares in the new company
New shares may only be issued when the new company has no other issued shares apart from subscriber shares and any new shares already issued as part of the same exchange
Each class of new shares must correspond exactly to the class and rights of the old shares for which they are exchanged, and must be issued to the same holders in proportion to their original holdings
The exchange must qualify under the capital gains tax reorganisation provisions so that it is not treated as a disposal of old shares or an acquisition of new shares

Access full legislation.And much more.

By becoming a member, your team gets full access to Tax World research tools and source-backed tax resources.

Become a member