HMRC updated its Capital Gains Manual with guidance on Budget 2025 anti-avoidance changes and statutory clearance procedures.

RF Report

The UK tax authority, HM Revenue & Customs (HMRC), on 12 December 2025, released updates to its Capital Gains Manual, providing guidance on measures announced at Budget 2025, effective from 26 November 2025.

The updates clarify HMRC’s approach to statutory clearance procedures and explain the application of certain corporate reorganisation provisions in the context of international mergers.

CG-APP19 – Interim Guidance on Share Exchanges and Company Reconstructions Anti-Avoidance Rules

Budget 2025 introduced changes to the anti-avoidance rules relating to share exchanges and company reconstructions. Full details are available at: Capital Gains Tax: Share Exchanges and Reorganisations. The Capital Gains Manual will be fully updated once the revised legislation receives Royal Assent. In the meantime, this appendix provides:

  • Provisional guidance on the changes, and
  • Answers to questions regarding statutory clearance applications.
  1. Provisional Guidance on Changes to the Anti-Avoidance Rules

The following anti-avoidance rules in the Taxation of Chargeable Gains Act 1992 (TCGA) will be amended:

  • Section 137 – Share and debenture exchanges and shareholder treatment of company reconstructions (also covered in Sections 135 and 136).
  • Section 103K – Exchanges, mergers, and reconstructions of collective investment schemes (Sections 133G–103I).
  • Section 139(5) – Business transfers as part of a scheme of reconstruction.

This note primarily focuses on Section 137, as similar changes are reflected across the other provisions.

Under the current rule, a share exchange is subject to anti-avoidance if it fails either of the following conditions:

  1. It is carried out for bona fide commercial reasons; and
  2. It does not form part of a scheme whose main purpose, or one of the main purposes, is avoidance of Capital Gains Tax (CGT) or Corporation Tax on chargeable gains.

If the rule applies, Section 135 does not treat the exchange as a share reorganisation, so shareholders are treated as disposing of the exchanged securities rather than receiving “no disposal” treatment under Section 127. Currently, the rule excludes shareholders holding 5% or less of any class of shares in the original company.

Revised Rule:

The revised rule applies where:

  • There are arrangements involving a securities exchange; and
  • The main purpose, or one of the main purposes, of the arrangements is to reduce or avoid a CGT liability.

The change follows the Court of Appeal’s confirmation that the prior wording focused on the purpose of the exchange itself, which may not capture tax avoidance embedded in broader arrangements. The new approach targets the arrangements designed to gain a tax advantage, consistent with modern Targeted Anti-Avoidance Rules (TAARs), and removes the requirement for bona fide commercial reasons.

Effect of the Rule:

Rather than entirely disapplying the share exchange treatment, HMRC can now make proportionate adjustments to counteract only the tax advantage obtained. Shareholders holding 5% or less are no longer automatically excluded. Adjustments may be made through existing assessments, new assessments, or discovery assessments and are intended to ensure a fair and reasonable counteraction.

HMRC’s established guidance on “arrangements,” “tax advantage,” and “main purpose” is set out in CG40242–CG40247, and the revised rule applies only to arrangements designed to reduce or avoid CGT, not to those that merely defer liability.

The revised Section 137 applies to exchanges where new securities are issued on or after 26 November 2025, subject to statutory clearance under Section 138.

  • Applications received before 26 November 2025 will be considered under the old rules.
  • If clearance is granted before 26 November 2025, it remains valid if the transaction completes by 26 January 2026, or within 60 days of a later clearance.
  • Clearance refused by HMRC but granted on First-tier Tribunal review will take effect from the tribunal’s decision.

Example:

  • Mr X and Ms Y each originally held 50% of A Ltd. After issuing shares to employees, their holdings dropped to 40% each.
  • B Inc seeks to acquire A Ltd. Mr X requests loan notes instead of cash to avoid UK CGT.
  • HMRC would apply the anti-avoidance rule to Mr X’s arrangements only, leaving Ms Y and employees unaffected.
  • Calculation:
    • Cost of Mr X’s shares: 500,000
    • Consideration via loan notes: GBP 10,000,000
    • Gain: GBP 9,500,000 (ignoring Section 135)
    • Counteraction: Section 135 disapplied for Mr X’s shares, creating a chargeable disposal.
  • If subsequent steps in tax avoidance are attempted, Section 137 may not apply, but other rules could still limit avoidance.
  1. Statutory Clearance Guidance (Sections 138 & 139 TCGA 1992)
  2. Clearances received before 26 November 2025:
  • Remain valid if the transaction completes by 26 January 2026.
  • If the deadline cannot be met, a new application under revised rules is required.
  1. Changes to a transaction after clearance:
  • Clearance only applies to the specific facts and circumstances submitted.
  • Modifying the transaction may require a new application under the revised rules.
  • Applications submitted on or after 26 November 2025 are reviewed under the revised rules, including changes to previously cleared transactions.
  • No time limit applies to clearance notifications under the revised rules.
  1. Applications submitted before 26 November 2025 but not decided:
  • Will be processed under the old rules.
  • Requests for further information must be answered within 30 days.
  • Clearance under the old rules requires transaction completion within 60 days, otherwise a new application under the revised rules is needed.

Earlier, the UK government published Budget 2025 on 26 November 2025, introducing various measures to improve digital tax administration.