Budget 2025: Changes to share exchanges and reorganisations rules

Previous articles have explored the statutory clearance procedure available when undertaking share exchanges or schemes of reconstructions (eg, demergers): Understanding the statutory clearance process and HMRC’s appetite for clearance. These articles highlighted the importance of articulating commercial purpose, explaining the steps taken, and anticipating HMRC’s concerns over whether particular elements had a tax-motivated intention. However, draft legislation included in Finance Bill 2025-26 (cl36-38) requires that previous analysis to be revisited.

Over the years, we have become familiar with the commercial purpose and avoidance motive tests built into s137(1), Taxation of Chargeable Gains Act (TCGA) 1992. So, it was something of a surprise when s137(1) and s139(5) TCGA 1992 were replaced with a new test that focuses solely on whether any part of the arrangements has a main purpose of reducing or avoiding tax, and which does not have a commercial purpose test at all. In practice, this lowers the threshold for HMRC intervention and creates a more flexible counteraction mechanism. However, the old-style tests still remain in s831, Corporation Tax Act 2009 (the reconstructions rule for chargeable intangible assets) and s75 and s77, Finance Act 1986 (stamp duty reliefs).

However, we must proceed with caution: while the revised test removes certain conceptual obstacles HMRC faced in recent litigation, it also introduces new areas of uncertainty for advisers, particularly during the transition period.

Why the rules have been changed

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. This phrasing ultimately proved fatal for HMRC in several recent cases.

In Wilkinson and others v HMRC [2023] UKFTT 695 (TC), the taxpayers carried out a share sale, partly as an exchange for loan notes and buyer shares, as part of the wholly commercial sale of a company. Steps were introduced that had the effect of securing a more favourable capital gains position for certain family members. The First-tier Tribunal (FTT) accepted that these inserted steps had a tax-avoidance purpose. However, the critical point was that the share exchange itself was not “part of” the avoidance arrangements. The tax-motivated steps sat within the exchange, rather than the exchange forming part of the avoidance scheme.

Because s137, TCGA 1992 required the exchange to be part of a broader avoidance scheme, HMRC was unable to apply the rule. The court’s reasoning effectively revealed that even where an avoidance purpose is present, s137, TCGA 1992 may fail unless the structure of the transaction fits the statutory language precisely.

The Court of Appeal decision a few months later in Delinian Limited v HMRC [2023] EWCA Civ 1281 followed the same pattern. A corporate group engaged in a sizeable share exchange as part of a wider corporate sale process. Certain pre-sale steps were clearly designed to achieve a more favourable tax outcome, by accessing the substantial shareholding exemption (Sch 7AC, TCGA 1992) for part of the sale proceeds.

The court concluded that although avoidance motives were evident, the share exchange was not part of the avoidance arrangements, but rather the other way around. The result was that HMRC’s interpretation could not be sustained.

Taken together, these cases illustrate that the previous legislation failed to mitigate the tax avoidance when:

• the overall transaction was commercial;
• the exchange itself was not avoidance; but
• individual components of the arrangements were inserted for tax reasons.

It is worth noting that the courts did not criticise HMRC’s anti-avoidance objectives; rather, they held that the statute did not permit HMRC to counteract avoidance in the way HMRC believed it did. The decisions left HMRC unable to address targeted tax-motivated steps within certain corporate reorganisations.

The government has now stepped in to close this gap.

The new anti-avoidance rules

The Finance Bill 2025-26 introduces a fundamentally new test for all the principal reconstruction provisions (s135–139, TCGA 1992).

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. This directly neutralises the reasoning in the cases of Wilkinson and Delinian. 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.

The new legislation (new s137(7)) explicitly defines “arrangements” to include “any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable)”, which ensures that HMRC can look holistically at the matter rather than being constrained by narrow statutory boundaries.

Perhaps the most practically important change is that HMRC may now counteract the tax advantage by making such adjustments as are “just and reasonable” including, in appropriate cases, partially disapplying the reconstruction relief.

This represents a fundamental shift. Previously, HMRC’s only option was to deny relief in full. Now:

• HMRC is able to target only the tax-motivated element;
• different shareholders may be treated differently; and
• the commercial aspects of the transaction may still attract relief.

From a planning perspective, this introduces both flexibility and risk.

On the downside, the previous safe harbour for shareholders holding 5% or less of a company’s ordinary share capital is removed. This 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.

The clearance provision is also updated so that approval is given only where the transaction is carried out “without arrangements” to which the new s137(1) and s139(5) apply. This places a greater burden on taxpayers to explain fully each step of the transaction.

What this means in practice

The previous all-or-nothing approach forced HMRC either to deny relief entirely or to accept that some avoidance would pass through unchecked. The new regime allows HMRC to isolate and counteract the undesirable portion without disturbing commercially driven steps.

This means HMRC will be better placed to challenge certain types of arrangement, including:

• inserted shareholder transfers;
• last-minute class reorganisations;
• steps designed to move value between family members or mitigate tax liabilities; and
• arrangements aiming to access reliefs such as Business Asset Disposal Relief (BADR) of the Substantial Shareholdings Exemption (SSE).

Because the test now applies to arrangements with a tax-avoidance purpose, not simply the exchange itself, it becomes much easier for HMRC to raise concerns. A relatively small component may be sufficient to trigger scrutiny.

Take the Wilkinson case as an example. Under this new regime, the individual steps that were inserted to get a more tax advantageous result can now be targeted in isolation. There are numerous other practical examples where reliance has been placed on the fact that strong commercial rationales exist for the transaction as a whole and therefore this is sufficient to achieve comparatively minor corollary tax savings.

Under the new anti-avoidance provision, we would not be surprised to see further scrutiny from HMRC in relation to this planning given that the demerger includes arrangements to reduce corporation tax (by uplifting the base cost of the properties in question).

The rewrite of the anti-avoidance test changes how HMRC are likely to scrutinise clearance applications as they are more likely to focus on:

• why each step is included;
• whether alternatives were possible;
• who benefits from the structure; and
• whether any party’s tax position is improved by a deliberate design.

This will increase the need for detailed commercial justifications.

Implications for the clearance process

In earlier articles, it was noted that HMRC’s clearance unit has, in recent years, concentrated heavily on the commercial rationale for transactions. The new test removes commerciality as a statutory requirement, which would appear helpful at first glance. However, as we noted above, the clearance unit will still require a commercial explanation for clearances sought for the same reorganisation or reconstruction under the corporate intangibles regime and they will have to continue to assist HMRC Stamp Taxes with the commercial purpose tests in the stamp duty relief provisions. So, in practice, we suggest that HMRC will still need to ask questions where the commercial purpose appears thin, as well as where steps appear to exist solely for tax positioning.

Given the expanded concept of “arrangements”, HMRC will likely request additional explanations and we can anticipate more cycles of HMRC follow-up questions, particularly until internal guidance and practice settle.

Although the statutory 30-day deadline still applies, in practice many responses are already taking longer because HMRC often asks for further information and the new anti-avoidance test is likely to increase this.

The removal of minority shareholder protection means reorganisations involving management incentive holders or passive investors will also require more thought.

How to adapt to the changes

The new regime requires advisers to break down transactions into their constituent parts. Each discrete step should have its own commercial rationale.

Rather than avoiding the subject, it is worth directly acknowledging steps that improve a taxpayer’s position and demonstrating why these arise from commercial or structural necessities rather than an avoidance motive.

Clients should be prepared for:

• more HMRC questions;
• longer clearance timelines; and
• potential partial counteraction even after clearance is granted, where HMRC later identifies undisclosed avoidance steps.

Although the new legislation will apply from 26 November 2025, the draft legislation provides some limited protection where clearance applications have already been submitted before that date. Provided the transaction completes (or, in the wording of the legislation, the “issue of shares or debentures” is) 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.

Careful monitoring of deal timetables will be needed in late 2025 and early 2026.

New burdens

The new anti-avoidance test represents a decisive shift in the tax treatment of corporate reconstructions. While it resolves the apparent weaknesses (at least from HMRC’s perspective) highlighted in recent litigation, it also introduces new practical burdens.

Clearly, the issue for advisers is no longer whether a transaction is commercial, but whether any step within the wider arrangements could be said to carry a tax-avoidance purpose. In practice, the safest approach will be to demonstrate, with supporting evidence, the necessity and rationale for each component.

Pete Miller, Technical Director, and Nick Wright, Head of Corporate Tax, Jerroms Miller Specialist Tax