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Amendments included in the Finance Bill 2025-26, which is currently proceeding through Parliament, expand the anti-avoidance rules relating to share-for-share exchanges and other corporate reorganisations. The government is seeking to tighten the availability of tax-neutral treatment of transactions in which shares are issued as consideration or as part of certain reorganisations. The changes have been introduced in response to two 2023 decisions, in which the courts rejected HMRC's contention that anti-avoidance rules applied to structures with a clear tax planning element. The changes took effect from the date of the Autumn Budget 2025 and will affect current and pending transactions.
The usual position is that rollover relief will be available on 'paper for paper' transactions, where shares (or debentures) are issued by an acquirer company in exchange for shares (or debentures; the remainder of this article deals solely with exchanges of shares) in a target company, following which the acquirer company holds 25% of the ordinary share capital, or the majority of voting power, of the target, or where the exchange results from a general offer to shareholders of the target which is conditional on the acquirer achieving control. The UK tax attributes of shareholders in the target shares are, broadly, rolled into the newly issued shares in the acquirer, and no tax liability is triggered until the relevant shareholder subsequently disposes of those new shares. Similar relief is available for certain schemes of reconstruction.
Under the previous rules, rollover relief was only available for holders of more than 5% of the relevant class of shares where the exchange was effected for bona fide commercial reasons and did not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, was avoidance of liability to capital gains tax or corporation tax. The decisions in Delinian Ltd v HMRC [2023] EWCA Civ 1281 (also referred to as the "Euromoney" decision) and Wilkinson v HMRC [2023] UKFTT 695 (TC), discussed on the Weil Tax Blog in September 2023 and November 2023 (respectively), and in our January 2024 article published in Tax Journal, effectively indicated that only a single scheme would be identified for these purposes (usually the transaction as a whole), so that an individual step or component could have a tax avoidance purpose as long as this was not a main purpose of the overall transaction. The test posed in those decisions was distinct from the statutory language, and at odds with the usual approach to general anti-avoidance rules, where an overall transaction can include many schemes, including each individual step.
The new rules specify that rollover relief will be unavailable where there are "arrangements" with a main purpose of reducing or avoiding a tax liability which "relate" to the share exchange. Any tax reduction resulting from that arrangement will then be counteracted, even if that arrangement represents only one step in a broader transaction. The new anti-avoidance test applies to all shareholders (the 5% de minimis threshold test under the previous rules has been removed). HMRC are required to deny rollover relief "in an appropriate case" or make "just and reasonable" adjustments, and the presence of a commercial purpose is no longer required.
The new rules still refer to arrangements "to reduce or avoid liability to tax", so that mere deferral of a taxing point is arguably not proscribed (although various industry stakeholders have sought explicit confirmation on this point). In its interim guidance, HMRC clarify that the new rules do not apply "where the advantage is the mere deferral of a liability, which is the intended effect of the share exchange provisions". However, there has been no indication from government that the legislation itself will be amended to provide taxpayers with certainty on this fundamental issue.
The amendments somewhat complicate the anti-avoidance rules, and potentially mean that steps outside of the share exchange itself could be subject to counteraction. The "just and reasonable" adjustments to be made, while not within HMRC's discretion in a strict sense, are also vaguely defined. The new mechanism for making these adjustments adds an additional layer of uncertainty, where the operation of the previous rules was (theoretically) automatic and binary. The removal of the commercial purpose test arguably will be welcomed by some advisers, however; this was an unneeded aspect of the existing analysis, and identifying a main purpose of tax avoidance will now be the important factor.
Taxpayers can still apply to HMRC for a statutory clearance, to confirm that a proposed share exchange will not fall foul of the new anti-avoidance rules. However, any HMRC clearance must be obtained prior to the share exchange, and HMRC typically will not consider a clearance to be binding unless all relevant circumstances have been disclosed. Taxpayers seeking clearances under the new rules may expect:
- increased scrutiny: it is likely that HMRC will require a more detailed explanation of the main purpose of the transaction to justify why clearance should be granted;
- increased uncertainty: it is less certain that HMRC clearance will be obtained, even for rollover transactions that may be considered to be "plain vanilla"; and
- increased delays: there is more scope for delays on clearance applications as HMRC have a wider scope to probe the purposes of the rollover arrangements.
With the uncertainties present in the new rules, UK companies (and companies with UK shareholders) should exercise caution any time a tax planning motive is indicated for any particular step of a transaction involving rollover relief, even if only a subset of shareholders would achieve a tax benefit. Despite industry bodies making various submissions to the government, formal consultation is not underway and it is expected that the rules will be enacted as proposed. Please speak to your usual Weil Tax contact for further information regarding the scope and application of the new rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
