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Tax Bite – The new share exchange / reconstruction anti-avoidance provisions – more detailed HMRC guidance

Tax Bite – The new share exchange / reconstruction anti-avoidance provisions – more detailed HMRC guidance

In our Budget 2025 Tax Bite, we flagged the unexpected changes to the anti-avoidance rules for share for share / share for loan note exchanges and company reconstructions. Six months on (and notwithstanding the fact that the new rules came into effect on Budget day, subject to some limited transitional rules) HMRC have now published some more detailed guidance on the application of the new rules, following on from some more limited transitional period guidance published previously.

First, a very quick reminder of what has changed in the rules. Previously, for the anti-avoidance provision to be triggered, the overall arrangements of which the share exchange / reconstruction formed part had to have tax avoidance as the main purpose or one of their main purposes. HMRC lost a couple of cases in this area where specific tax-improving reconstruction steps were inserted into an otherwise fully commercial transaction, in order for one party benefit from a certain tax relief that, absent those steps, would not have applied – HMRC lost on the basis that tax avoidance was not a main purpose of the overall transaction / arrangements. Put simply, the new rule instead allows HMRC to target any specific steps that involve exchanges of securities with a capital gains tax avoidance or reduction purpose, and to counteract the advantage sought from those steps.

In HMRC’s own language from the new guidance: “Put simply: the changes to the rule are intended to deter and, where necessary, counteract, situations where additional arrangements have been included in a commercial transaction in order to reduce or avoid a liability to tax on chargeable gains”.

There are some other differences in how the old and new rules apply, but perhaps of most interest is how HMRC will approach common situations in the new regime. The new guidance sheds some light:

Deferral is not avoidance. HMRC helpfully confirms (as indicated in their previous transitional guidance) that the rule does not apply where the only advantage is the deferral of a gain, since deferral is precisely what the share exchange rules are designed to provide.

Preparatory reorganisations (NB compared with deal-driven tax reduction planning). HMRC does not consider the rule would apply to reorganisations undertaken as a genuine preparatory step into a “tax-advantaged regime”. They give the example of separating trading and investment activities with a view to a future sale of the trading side qualifying for the substantial shareholdings exemption once all the conditions have been met for long enough. This must be contrasted with the situation where a transaction is about to happen, a particular relief (e.g. SSE) would not be available, and the parties try to defer the tax point through e.g. a share for share exchange and structure the consideration so that the relevant seller would qualify for the relief when the new shares are sold later on – that is what happened in one of the cases HMRC lost, and an example of where HMRC consider the new rule definitely would bite.

PE structures and earn-outs. HMRC has indicated that typical private equity management reinvestment structures (usually involving a stack of Newcos and loan note rollovers) and structuring earn outs by way of payment in loan notes or shares to take advantage of a specific earn-out CGT deferral rule set out in the legislation, should not engage the new rule.

Some specific examples are given at the end of the new guidance. Of perhaps the most interest are the examples on capital reduction demergers, as these involve numerous detailed steps intended to ensure that various tax-neutral provisions apply to the separation of, for example, two trading divisions of a single company, or a trade from investments, often ultimately in the expectation that one side will be sold in a way that basically only triggers a single layer of CGT on the gain relating to the part that is sold. We would always argue, and HMRC generally agreed in clearance applications under the old rules, that this was nothing more than taking advantage of the tax-neutral reconstruction rules specifically provided for in statute, and not tax avoidance. The examples in the new guidance would appear to support the view that HMRC should not seek to engage the new anti-avoidance rule on any of the steps of a “classic” reduction of capital demerger, even if there is a planned sale of one side.

However, HMRC guidance is notoriously not binding law and can be subject to change, and we are still in the early days of the new regime. Accordingly, we strongly recommend seeking HMRC advance clearance (or at the very least taking advice on the merits of clearance) for any rollover or reconstruction in cases where time permits.

Please note that the “transactions in securities” income tax anti-avoidance provisions (being the second aspect that is addressed in a typical rollover clearance, i.e. in addition to the CGT rollover aspect) are still very much in force and have not been amended, so this is another reason to encourage seeking clearance wherever possible. Transactions in securities will be a topic for another Tax Bite!

As always, please get in touch with us if you would like to discuss how the new anti-avoidance rules or this new guidance may affect a transaction you are advising on or considering.