HMRC has updated its Capital Gains Manual to reflect changes to the Section 137 anti-avoidance rule for share exchanges and company reconstructions introduced by the Finance Act 2026 and effective from 26 November 2025.
The UK’s HMRC outlined changes to Section 137 of the Taxation of Chargeable Gains Act 1992 (TCGA) that took effect on 26 November 2025, published in the Capital Gains Manual on the Anti-avoidance rule for share exchanges and company reconstructions from November 2025.
The UK anti-avoidance rules for share exchanges and company reconstructions took effect on 26 November 2025, following legislation in the Finance Act 2026.
The revised rule, primarily centered on Section 137 of the Taxation of Chargeable Gains Act 1992, shifts from focusing on the “bona fide commercial reasons” of an exchange to a more targeted “purpose” test. It now applies when:
- There are arrangements relating to an exchange of securities.
- A main purpose of those arrangements is to reduce or avoid a capital gains liability.
This change was driven by court rulings suggesting the previous wording was too narrow, often failing to capture tax avoidance arrangements embedded within otherwise commercial transactions.
Key principles and application
- Deferral vs. avoidance: HMRC maintains that the mere deferral of tax is not avoidance. The rule targets arrangements designed to eliminate or reduce a tax charge altogether, rather than just delaying it in accordance with the intended purpose of the legislation.
- Proportionate counteraction: Unlike the previous rule, which could disapply “no disposal” treatment for all participants, the revised rule allows HMRC to make “just and reasonable” adjustments. This ensures counteraction is proportionate and only affects the specific shareholders obtaining a tax advantage.
- Removal of the 5% threshold: The previous exemption for shareholders holding 5% or less of a company has been removed. Small shareholdings can still yield significant tax advantages, so they are now within scope if they benefit from avoidance arrangements.
- Self-Assessment and HMRC powers: While HMRC uses its enquiry powers to apply the rule, taxpayers are expected to self-assess and include adjustments in their returns if they believe the rule applies.
Exclusions and safe harbours
HMRC has clarified that the rule is not intended to disrupt standard commercial restructuring that aligns with the intent of tax reliefs, including:
- Preparatory reorganisations: Restructuring to prepare a business for entry into beneficial regimes, such as Real Estate Investment Trusts (REITs) or the Substantial Shareholding Exemption (SSE), is generally acceptable if it does not subvert the regime’s requirements.
- Private equity structures: Arrangements allowing management to choose between tax-deferred reinvestment or post-tax cash proceeds, or the use of “blocker” companies for overseas structures, are typically not viewed as avoidance.
- Earn-outs: Structuring an earn-out as securities (under Section 138A) rather than cash is generally considered consistent with the purpose of the legislation.
Earlier, The UK’s Finance (No. 2) Bill 2025-26 was granted Royal Assent on 18 March 2026, introducing measures across income, corporate, and inheritance taxes, environmental levies, and tax administration.
