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The no gain/no loss rule does not apply to a share exchange where the exchange qualifies as a reorganisation of share capital. The effect of treating the share for share exchange as a reorganisation is that for the transferor, the newly acquired consideration shares are treated as the same asset, acquired at the same time and for the same amount, as the transferred shares.

The new shares effectively 'stand in the shoes' of the old shares, with the result being that any gain or loss is effectively rolled over into the new holding. The transaction is treated as involving no disposal. Since the effect of a reorganisation is that there is no disposal, the logic is that the no gain, no loss rule cannot apply¹.

This is important from the transferee's perspective. It means that the transferee is treated as acquiring the transferred shares at market value, because the exchange is a transaction between connected parties, deemed to be otherwise than at arm's length².

Although the reorganisation