Budget 2025 – Changes to anti-avoidance for share exchanges and reorganisation rules – what this means for your transactions

Buried in the fine print of the Budget documents, and without any apparent leaks or prior consultation (in contrast to most other changes), HMRC has amended the anti-avoidance rules for share exchanges and company reorganisations with immediate effect.  

Although the legislation in currently in draft, once enacted it will apply to transactions taking place on or after 26 November 2025.

What has changed and why it matters

“Paper for paper” transactions can benefit from tax rollover treatment to avoid capital gains tax (for individuals) or corporation tax (for companies) being charged on consideration which takes the form of shares or loan notes (rather than cash). This rollover relief covers a number of transactions, from company sales (where the purchasing company issues its own shares as consideration for the deal) to corporate group reorganisations.

HMRC can, however, counteract this rollover relief where the transaction has a main purpose of avoiding capital gains tax or corporation tax (or until yesterday, if the transaction was not being carried out for genuine commercial reasons). Due to this, it is possible to obtain advance clearance (known as a “section 138” clearance after the relevant legislation) from HMRC that it will not use its counteraction power for the particular transaction.

Obtaining a section 138 clearance is strictly speaking optional (it is not a requirement for rollover relief) but is generally seen as prudent for many transactions if time permits. However, as HMRC has up to 30 days to respond, time pressured transactions (or transactions that clearly don’t fall foul of the counteraction power) do in practice proceed without obtaining a clearance.

HMRC has now rewritten the counteraction power, with the new version (whilst still in draft) applying with immediate effect. Taxpayers should be aware of the following key points:

Transitional rules where clearance has already been sought

• If a section 138 clearance has already been obtained, but the transaction has not yet been implemented, then the previous version of the rule will only apply if transaction takes place before 26 January 2026. If the transaction is delayed until after that date, due consideration will need to be given to obtaining a fresh clearance under the new version of the rule.
• If a section 138 clearance request was submitted before midnight on 25 November 2025, and HMRC clearance is successfully received, then the old version will apply provided the transaction takes place within 60 days of receiving clearance. Again, if the 60-day window is missed, it will need to be assessed whether to obtain a fresh clearance.

A different approach to “arrangements”

• Under the old rule, HMRC could counteract rollover treatment if the relevant share exchange or scheme of reconstruction formed “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”, or was not carried out for bona fide commercial reasons.  This formulation has worked against HMRC in recent court cases where the “arrangement” has been identified as a wider commercial transaction, with the tax avoidance element (whilst being present) not forming a main purpose of that wider arrangement.
• The new rule applies “in respect of arrangements relating to an exchange or scheme of reconstruction…if the main purpose, or one of the main purposes, of the arrangements is to reduce or avoid liability to capital gains tax or corporation tax”. Coupled with the comments in the HMRC policy note, the intention appears to be legislate around recent court decisions by allowing HMRC to counteract tax avoidance arrangements even where they are only a small part of a wider transaction which is entirely commercially driven. Specifically, HMRC states in its policy note: “The proposed revisions mean that the rule will now better target those cases where, as part of a commercial exchange or company reconstruction, additional arrangements have been put in place to obtain a tax advantage”.
• It’s also noteworthy that the “bona fide commercial reasons” component has been dropped entirely, and HMRC have seen fit to expand the wording to include any avoidance “or” reduction of tax, whereas the previous legislation just referred to avoidance.
• Finally, the concept of “arrangements” has been given a new, and extremely wide, statutory definition (which can be found elsewhere in the tax code), including whether or not it is legally enforceable. In practice, “arrangements” will need to be interpreted widely and could cover just about anything.

A new “just and reasonable” adjustment

• Instead of an all-or-nothing denial of deferral, HMRC may now counteract by “the making of such adjustments as are just and reasonable (in light of the reduction or avoidance)”, including by disapplying rollover relief “insofar as is required”.
• Whilst this appears to be helpful in principle, we await guidance on how HMRC will apply it in practice.

Removal of the de minimis protection for small minority holders

• The previous rule prevented counteraction for holders of less than 5% of the relevant class of shares or loan notes. This protection has been removed, so minority shareholders can no longer take comfort (in the absence of a section 138 clearance) from being below 5%.

In summary, it is clear the revised legislation is potentially wider than its predecessor in catching tax avoidance or reduction arrangements even when they are part of a larger genuinely commercial transaction. It follows there could be increased uncertainty on how the rules apply when approaching all but the most vanilla of transactions.

What we recommend

Whilst section 138 clearances have always been the prudent approach, HMRC’s change to the longstanding anti-avoidance rule means it is as important as ever to obtain advance tax clearance – particularly until there is greater clarity on how HMRC intends to apply the revised rule to common transactions such as the use of loan notes in private equity transactions.

The need for tax clearances should be budgeted into transaction timetables from an early stage.

Transactions which have not yet taken place, but for which section 138 clearance has been obtained or was requested before Budget day, will need to adhere to the 60 day rule or face having to be re-evaluated against the new legislation.

If you would like to discuss how these changes may affect specific transactions or structures, please contact a member of our tax team.