A company may become the target of another company that wants to expand its business through acquisition. When a company is targeted for acquisition, the acquiring company is likely to want to distance itself from any contingent liabilities, warranties and commitments built up by the target company. To achieve this, it is common for the acquiring company to require that a new holding company is put above the target company, providing a clean new company without the potential liabilities the target company might have.

The creation of the holding company is achieved by:

• the shareholders in the target company (Oldco) forming a new holding company (Newco);
• Newco acquiring the shares in Oldco in exchange for shares in Newco.

Provided the transaction is carried out correctly:

• there will be no disposal for capital gains tax purposes when newly issued shares are issued in exchange for the existing shares; and
• the original shareholding and the new shareholding are treated as a single continuous asset.

The full amount of any capital gain will then be chargeable on the sale of the shares in the new holding company when it is taken over.