CGT share exchanges: HMRC clarify revised anti avoidance rule

A refocused purpose test

Under the previous rule, section 137 did not apply where a share exchange was effected for bona fide commercial reasons and did not form part of arrangements with a main purpose of avoiding CGT or corporation tax on chargeable gains. In Euromoney, the Court of Appeal confirmed that this wording focused on the purposes of the whole of the scheme or arrangement undertaken by the taxpayer in question, not a selected part or parts of them.

The revised rule removes the ‘bona fide commercial reasons’ condition and instead applies where there are arrangements relating to an exchange or reconstruction and a main purpose, or one of the main purposes, of those arrangements is to reduce or avoid a liability to CGT or corporation tax on chargeable gains. The guidance makes clear that the focus is now on particular features or steps built into a transaction, rather than on the overall commercial rationale.

Deferral is not, by itself, avoidance

A key point of reassurance, particularly for owner‑managed businesses, is HMRC’s clear statement that deferral alone is not regarded as a tax advantage for the purposes of section 137. Where the only benefit obtained is the deferral of a gain in a way that is fully consistent with the purpose of the share reorganisation rules, the anti‑avoidance rule should not apply.

This distinction draws on long‑established case law and was reinforced by the Court of Appeal in Euromoney, which contrasted legitimate statutory deferral with arrangements intended to secure a permanent non‑payment of tax.

Proportionate counteraction

Another significant change is the effect of the rule when it applies. Previously, section 137 simply disapplied the share exchange provisions, potentially triggering immediate CGT charges for all shareholders, including those who did not benefit from the avoidance arrangements.

Under the revised approach, HMRC may instead make ‘just and reasonable’ adjustments to counteract the tax advantage. Importantly, only those shareholders who actually benefit from the arrangements should be affected. The historic exclusion for shareholders holding 5 percent or less has been removed, reflecting HMRC’s view that even small shareholdings can carry significant value and tax advantages.

Focus on the exchange or scheme of reconstruction

HMRC confirm that the anti-avoidance rule tightly focusses on arrangements relating to the share for share exchange or scheme of reconstruction. The intention is that the rule will apply where the arrangement results in the existence of an exchange or a particular feature that is included with the purpose of reducing or avoiding a liability to tax.

HMRC also indicate that the rule should not apply to preparatory reorganisations carried out to place a business into a tax‑advantaged regime, such as a REIT, the non-resident capital gains exemption regime, or an employee ownership trust, provided the conditions of those regimes are genuinely met and not manipulated.

What this means in practice 

The guidance contains a series of worked examples where the relief may be restricted:

• Where loan notes or particular classes of shares are introduced into an otherwise commercial sale to allow a shareholder to avoid CGT by emigrating or accessing reliefs that would not otherwise be available;
• Where shares are transferred shortly before a sale to use a spouse’s Business Asset Disposal Relief lifetime limit; and
• Where securities are structured to bring a future disposal within the Substantial Shareholding Exemption when that disposal would otherwise not qualify.

The HMRC guidance does, however, confirm that the anti-avoidance rule would not apply where an unascertainable earn-out is in the form of securities rather than cash, as the ability to choose to structure an earn-out in the form of securities rather than cash reflects the purpose of section 138A TCGA 1992.  

The guidance also gives comfort that the anti-avoidance rule should not apply where management shareholders have a degree of choice in how to reinvest (e.g. on private equity transactions they may have the option to rollover their shares or alternatively cash out and reinvest proceeds). Additional steps to block overseas direct taxation of UK shareholders may also be acceptable.

Points to consider now

Businesses and advisers involved in share exchanges or reconstructions after 26 November 2025 should consider:

• Whether any additional steps or features in a transaction could be seen as arrangements with a main purpose of reducing or avoiding CGT;
• Whether the tax outcome goes beyond deferral and results in a permanent reduction in tax that is inconsistent with the legislation’s purpose;
• Whether disclosures or self‑assessed adjustments are appropriate where section 137 may apply; and
• Whether seeking advance HMRC clearance would be appropriate to provide certainty over any risk associated with the new rules.

While the revised rule is narrower and more targeted in its counteraction, the new guidance underlines HMRC’s intention to scrutinise the design of transactions closely. The changes make HMRC clearances all the more valuable to shareholders entering into transactions to give them certainty and confidence over their tax positions before implementing any share for share exchanges or reconstructions.

If you or your company are considering undertaking any steps that might be affected by these new rules, then please speak to the authors or your normal KPMG in the UK contact to discuss how the changes might affect your plans and whether HMRC clearances should be sought.

For further information please contact:

• Hannah Barraclough
• Paul Harden