A person who disposes of shares in a company at a gain may have tax to pay. But what if they receive non-cash consideration, for example, shares in another company (new shares) in exchange for their original shares? In this case, they may not have the funds to pay the tax. 

To address this issue, the legislation says that, provided certain conditions are met, a gain realised on a share exchange or reorganisation is deferred until the new shares are sold. It is possible to apply to HMRC for advance clearance that the transaction does not fall foul of the anti-avoidance provisions included in the legislation. 

Budget announcement

The anti-avoidance rules require that the exchange or reconstruction:

• is carried out for “bona fide commercial reasons”; and
• “does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to capital gains tax or corporation tax.” 

However, significant changes to these conditions, first announced at the Autumn Budget 2025, have been included in the Finance Bill 2025-26. 

In an article for TAXline, Wright explains that the changes are being made in response to some recent setbacks for HMRC in the tax courts. “The pre-Budget test had a rigid structure, as it applied only where the exchange or scheme of reconstruction themselves were “part of” a wider tax-avoidance scheme”, he said.  “This phrasing ultimately proved fatal for HMRC in several recent cases”. 

What’s changing?

For Wright, “the most significant element is the removal of the wording requiring that the statutory exchange or reconstruction be “part of” a tax-avoidance scheme. In its place, the relevant provision applies where “the main purpose, or one of the main purposes, of the arrangements is to reduce or avoid liability” to tax.” Following the change, says Wright, “it no longer matters that the exchange itself is commercially driven: if any component of the wider arrangements carries a tax-avoidance purpose, the section may bite”.

Other changes include allowing HMRC to deny relief in part – a “fundamental shift” from the previous all or nothing approach, says Wright – and removing the safe harbour for shareholders with 5%. For Wright, the latter “widens the scope of the regime considerably and will draw more transactions involving employee shareholders or passive minority holders within the scope of the avoidance test.”

There are also updates affecting the clearance process which, Wright warns, will place “a greater burden on taxpayers to explain fully each step of the transaction”. 

What does this mean for advisers?

Wright believes that, post-Budget, HMRC will change how it scrutinises clearance applications. An increased HMRC focus on why each step is included, and who benefits, will “increase the need for detailed commercial justifications”, explains Wright. 

Wright suggests that advisers should prepare their clients for more HMRC questions, longer waits for clearance and the risk of partial counteraction. 

When do the changes take effect?

The changes will become law once the Finance Bill 2025-26 receives Royal Assent. However, it is possible that amendments will be made to the Finance Bill as it makes its way through Parliament. 

Once enacted, the changes will apply from Budget day –  26 November 2025 – subject to transitional arrangements applying where clearance applications were submitted before that date. Wright explains that “provided the transaction completes by 26 January 2026 or, if later, before the end of the period of 60 days beginning with the day clearance was granted, the original clearance decision will apply”.