Transactions in securities - will you be paying income tax instead of CGT?

Transactions in Securities (TIS) is anti-avoidance legislation that allows HMRC to counteract certain income tax advantages arising from share transactions. It can apply where arrangements are intended to obtain capital gains tax treatment instead of income tax treatment, potentially resulting in a significantly higher tax liability. The rules can be particularly relevant to family-owned and other close companies where shareholders are connected.

A shareholder selling shares will generally expect to pay capital gains tax on the increase in value since acquisition. For disposals on or after 6 April 2026, the main CGT rates are 18% and 24%, depending on the taxpayer’s circumstances. Qualifying shareholders may also claim Business Asset Disposal Relief (BADR), currently taxed at 18% for qualifying gains, subject to the relevant conditions and lifetime limit.

However, if the TIS rules apply, HMRC may counteract the income tax advantage. Our role is to assess whether the proposed transaction can legitimately fall outside the TIS rules and help establish the appropriate tax treatment.

Which share transfers are at risk of the TIS rules?

The transactions in securities rules (TIS) are intended to prevent tax avoidance. In particular, TIS is  intended to prevent taxpayers from exploiting the attractive capital gains tax rates of tax which are lower than rates of income tax.  Not all share transfers will be caught by TIS anti avoidance legislation.   The legislation is limited to:

• Close companies;
• Cases where the main purpose of the transaction is to obtain a tax advantage by usually avoiding paying the higher rate of tax on a dividend; and
• The shareholders are connected and through that connection collectively retain a significant interest in the shares of the Company before and after the transaction.  Husband and wife shareholders and family members are often caught if they attempt a share buy back and do not present strong arguments as to why the transaction is commercial.

What transactions in shares are included within the transactions in securities legislation?

The rules are designed to prevent income tax advantages being obtained through transactions in securities. Their application depends on the statutory conditions and the facts of the transaction.

Relevant circumstances can include:

• Share buybacks, where a shareholder seeks capital gains tax treatment rather than income tax treatment on the proceeds.
• Issues of shares at a discount or changes to rights attaching to shares.
• Repayment of share capital or share premium.
• Distributions of company assets, including cash on a winding up.

Not every transaction is caught. An ordinary dividend is not, simply by being a dividend, a transaction in securities subject to these rules.

Close companies

The TIS rules can apply to transactions involving close companies. Broadly, a UK-resident company may be close if it is controlled by five or fewer participators, or by participators who are directors, subject to the detailed statutory tests.

Control and participation are defined broadly for tax purposes, so the analysis is not always straightforward. Many family-owned businesses, including companies owned by spouses, may be close companies.

Exceptions to the TIS rules

A key consideration is whether obtaining an income tax advantage is the main purpose, or one of the main purposes, of the transaction. The legislation also provides an exception where the relevant conditions concerning genuine commercial reasons and the absence of a main tax-avoidance purpose are satisfied

Important considerations include:

• A fundamental change in ownership: the extent to which the seller and their associates retain an interest in the company can be relevant. The rules on associates are broad and may include spouses, relatives, business partners and certain connected companies or trusts. A transaction should not be assumed to fall outside TIS simply because the seller transfers their own shares.
• Genuine commercial reasons: a transaction may have a commercial purpose, such as resolving a shareholder dispute, facilitating retirement or responding to a change in business direction. The reasons must be genuine and supported by the facts and evidence.
• Ordinary investment activity: the legislation contains an exception for transactions carried out in the ordinary course of making or managing investments, subject to the statutory conditions.

The commercial rationale and expected consequences of the transaction should be documented carefully. HMRC will consider the facts rather than simply accepting the explanation given by the parties.

Are your reasons good enough for HMRC?

Where a share buyback or other transaction may be affected by TIS, it may be possible to apply to HMRC for advance clearance. The application should explain the proposed transaction, its commercial rationale, the shareholdings before and after completion and the consideration to be received. Supporting documents, including relevant accounts and board minutes, can be important.

Clearance can provide greater certainty, but it depends on full and accurate disclosure of the proposed arrangements and the facts remaining consistent with those disclosed.

How much tax can HMRC reclaim?

The amount subject to counteraction under the TIS rules is governed by the relevant statutory provisions and the income tax advantage obtained. The calculation is fact-specific and should not be assumed to be limited simply to the company’s current distributable reserves.

Cash-rich companies and their directors should therefore assess the tax implications before approving a share transaction. Depending on the circumstances, a buyback or share capital reorganisation may be worth considering, but the alternatives must be reviewed carefully for tax and company law compliance.

Apply for clearance

A TIS challenge can result in an unexpected income tax liability where capital gains tax treatment was anticipated. Obtaining advance clearance, where available, can help establish whether HMRC will seek to counteract the relevant income tax advantage.

Gannons assists shareholders and directors with TIS risk assessments, transaction structuring and HMRC clearance applications, helping clients understand their options and protect their financial interests.