Section 610 of the Companies Act 2006 normally requires any premium on an issue of shares to be credited to a share premium account, even when the shares are issued for shares in another company rather than for cash. Section 612 (merger relief) switches that requirement off where the issuing company secures at least a 90% equity holding in another company in exchange for its own equity shares, and section 611 (group reconstruction relief) limits the premium to a minimum amount where a wholly owned subsidiary issues shares to its group for non cash assets. Section 615 then lets the company record the investment at the lower figure.

What does section 610 require when there is no relief?

Section 610(1) says that if a company issues shares at a premium, whether for cash or otherwise, a sum equal to the premium must be transferred to the share premium account. The words “or otherwise” catch a share for share exchange: if a company issues 1,000 shares of £1 each in return for shares worth £400,000, the premium is £399,000.

Share premium is hard to use. Section 610(2) and (3) allow it to write off the expenses of and commission on that issue and to pay up bonus shares, and section 610(4) applies the rules on reduction of share capital to it as if it were paid up share capital. Section 610(5) makes the whole section subject to sections 611, 612 and 614, which is where the reliefs come in.

When does merger relief under section 612 apply?

Section 612(1) applies where the issuing company has secured at least a 90% equity holding in another company under an arrangement for the allotment of its equity shares, with the consideration provided by the issue or transfer to it of equity shares in the other company, or by the cancellation of such shares it does not already hold. Section 612(2) then disapplies section 610 to the premiums on those shares. Section 612(3) extends the relief to shares issued under the same arrangement for non equity shares in the target.

Section 613 sets out how the 90% is measured:

  • The test is on the nominal value of the target’s equity share capital, not on votes or market value (section 613(2)).
  • It does not matter whether all the shares counted were acquired under the arrangement, so a company already holding 60% that acquires a further 35% for shares can qualify on the second acquisition (section 613(3)(a)). The ICAEW share for share helpsheet gives the same example.
  • Treasury shares in the target are ignored (section 613(3)(b)).
  • Where the target has more than one class of equity shares, the 90% must be reached in each class separately (section 613(4)).
  • Shares held by the issuer’s holding company, its subsidiaries, fellow subsidiaries or their nominees count as held by the issuer (section 613(5)).

Section 616 says that “company”, except for the issuing company, includes any body corporate, so the target can be an overseas company. The issuing company must be a company under the Act.

The ICAEW helpsheet says that where the conditions are met the relief must be applied. It also explains that cash paid by the issuer alongside the shares does not stop the relief applying to the share element, but if the issuer receives something other than target shares in return for its shares, such as target shares plus £100,000 of cash, the relief appears not to be available.

When does group reconstruction relief under section 611 apply instead?

Section 611(1) applies where the issuing company is a wholly owned subsidiary of a holding company and allots shares to the holding company, or to another wholly owned subsidiary of it, in return for the transfer to the issuer of non cash assets of a company in that wholly owned group. Section 612(4) says merger relief does not apply to a case within section 611, so section 611 has to be checked first.

Group reconstruction relief does not remove share premium entirely. Under section 611(2) the issuer need only transfer the “minimum premium value” to share premium. Section 611(3) to (5) define it as the amount by which the base value of the consideration exceeds the nominal value of the shares, where the base value of the assets is the lower of their cost to the transferor and their carrying amount in the transferor’s records immediately before the transfer, less the book value of any liabilities assumed.

How is the investment recorded once relief applies?

Section 615 allows the premium that is not recorded in share premium to be disregarded in deciding the amount at which the shares or other consideration received are included in the balance sheet. FRS 102 paragraph 22.8 excludes issues under sections 611 to 615 from its normal rule that equity is measured at the fair value of what is received.

FRS 102 paragraph A3.24 explains that, where the parent uses the cost model in paragraph 9.26 for its investment in the subsidiary, section 615 lets the initial carrying amount be reduced to the nominal value of the shares issued (merger relief) or to the previous carrying amount in the transferor’s books (group reconstruction relief). Paragraph A3.24A adds that other consideration transferred may also reflect the relief. If the investment is held at fair value under paragraph 9.26, section 615 is not available, although sections 611 and 612 still decide what goes to share premium.

Under the cost model a company therefore has a choice. It can record the investment at the nominal value of the shares issued, or at fair value with the difference credited to a separate reserve. The ICAEW helpsheet notes there are no strict naming rules, but “merger relief reserve” makes the origin clear.

What does this look like in numbers?

Illustration only. Topco issues 1,000 ordinary shares of £1 each to the shareholders of Target in exchange for 100% of Target’s shares. The Topco shares are worth £400,000.

Treatment Investment Share capital Share premium Merger relief reserve
No relief (section 610) £400,000 £1,000 £399,000 nil
Merger relief, nominal value £1,000 £1,000 nil nil
Merger relief, fair value £400,000 £1,000 nil £399,000

Illustration only. Sub A is a wholly owned subsidiary of Parent. Sub B, a fellow wholly owned subsidiary, transfers a building to Sub A in return for 100 shares of £1 each issued by Sub A to Parent. The building cost Sub B £50,000 and is carried in its records at £40,000; it is worth £90,000. The base value is £40,000, the lower of cost and carrying amount, so the minimum premium value is £39,900. Sub A credits £100 to share capital and £39,900 to share premium, and under section 615 can record the building at £40,000.

Is a merger relief reserve distributable?

The ICAEW and ICAS guidance on realised and distributable profits, TECH 02/17BL, which FRS 102 paragraph A3.29 refers preparers to, says at paragraph 2.11 that where the asset is recorded at fair value and the relief is credited to a separate reserve, that reserve is in law a profit but is initially unrealised, becoming realised in a way similar to a revaluation reserve. Paragraph 9.44 gives disposal of the investment for qualifying consideration, or an impairment write down of the investment, as examples of when it may become realised.

The guidance concludes that, provided the reserve is not capitalised by a bonus issue, the choice between nominal value and fair value should not overall change the company’s realised profits. Directors should still track the reserve separately when checking reserves before a dividend; see unlawful dividends.

How is merger relief different from merger accounting?

The ICAEW helpsheet stresses that the two share a word and little else. Merger relief is a company law relief from recording share premium in the issuing company’s own accounts. Merger accounting is a method of preparing consolidated accounts that FRS 102 paragraph 19.27 permits only for qualifying group reconstructions. A third party acquisition for shares can qualify for merger relief in the parent’s books while being acquisition accounted in the group accounts, and the choice made in the parent’s books changes the size of the reserve that arises on consolidation.

The tax treatment of the shareholders who swap their shares is a separate question again, covered in share for share exchanges.

What are the common mistakes?

  • Crediting share premium on a qualifying share for share exchange, when the ICAEW view is that the relief is compulsory once the conditions are met.
  • Applying merger relief to a transfer within a wholly owned group that falls within section 611, where only the minimum premium value can be left out.
  • Testing the 90% on votes or across all classes together, instead of by nominal value class by class.
  • Reducing the investment under section 615 while holding it at fair value, which paragraph A3.24 rules out.
  • Treating a merger relief reserve as realised and distributable from the start.
  • Assuming that because merger accounting cannot be used in the group accounts, merger relief is also unavailable in the parent’s own accounts.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.