Legislation update
Finance Act 2026: the new anti-avoidance test for reconstructions
Finance Act 2026 replaced the bona fide commercial reasons test in s137 and s139 TCGA with a main purpose test from 26 November 2025. What it means.
Most demergers that use a capital reduction or a liquidation rely on the capital gains reliefs for share exchanges and schemes of reconstruction in sections 135, 136 and 139 TCGA 1992. Each of those reliefs has an anti-avoidance rule. Finance Act 2026 rewrote those rules, with effect from 26 November 2025.
This article explains what changed, when, and what it means for anyone planning a demerger.
The short version
- The bona fide commercial reasons test has been replaced by a main purpose test focused on the arrangements.
- Where it applies, the tax advantage is counteracted by just and reasonable adjustments, rather than the relief being switched off for every shareholder.
- It applies to share issues and business transfers on or after 26 November 2025, with a transitional rule for clearances applied for before then.
- Clearance is still available under sections 138 and 139(5).
- HMRC accepts that deferral alone is not a tax advantage for this purpose.
The legislation
The changes are in sections 37 and 38 of the Finance Act 2026, which received Royal Assent on 18 March 2026. They were announced at the Autumn Budget on 26 November 2025, and HMRC published a policy paper and draft legislation that day.
| Old rule | New rule | |
|---|---|---|
| Share exchanges and reconstructions (s137) | Relief denied unless the exchange was for bona fide commercial reasons and not part of a scheme with a main purpose of avoiding CGT or corporation tax | Applies where a main purpose of the arrangements is to reduce or avoid CGT or corporation tax |
| Business transfer in a reconstruction (s139) | Relief denied unless the reconstruction was for bona fide commercial reasons and not part of a scheme with a main purpose of avoiding CGT, corporation tax or income tax | Applies where a main purpose of the arrangements is to reduce or avoid CGT, corporation tax or income tax |
| Effect if triggered | Relief disapplied | Just and reasonable adjustments, which can include disapplying the relief so far as needed |
| Small holders | Holders of 5% or less protected under s137 | No automatic protection |
| Clearance | s138 and s139(5): HMRC satisfied of commercial reasons and no avoidance | s138 and s139(5): HMRC satisfied there are no arrangements to which the rule applies |
"Arrangements" is defined broadly. It includes any agreement, understanding, scheme, transaction or series of transactions, whether or not legally enforceable.
When it applies
Section 137 (shareholders): the new rule applies to arrangements involving an issue of shares in, or debentures of, a company on or after 26 November 2025.
Section 139 (the company transferring its business): it applies to arrangements involving a transfer of assets of a business on or after 26 November 2025.
Transitional rule. The old rules continue to apply where all three of these are met:
- a company applied for clearance before 26 November 2025
- HMRC, or the tribunal, notified the company that it was satisfied
- the shares were issued, or the assets transferred, before 26 January 2026, or if later within 60 days of that notification
In practice, that window will almost always have closed, so a demerger being planned now should assume the new rules apply.
What HMRC says the rule is aimed at
HMRC has published guidance on the new rule in its Capital Gains Manual (appendix CG-APP20). The key points:
- Deferral is not avoidance. HMRC accepts that the rule does not apply where the advantage consists solely of deferring a liability. Deferral is what the reliefs are for.
- The focus is on the arrangements. The question is whether particular features have been added to reduce or avoid tax, not whether the exchange as a whole has a tax motive.
- Counteraction can be targeted. HMRC's examples show only the shareholder who benefits from the avoidance arrangements being affected, while the relief continues for other shareholders.
HMRC's examples of arrangements that could be caught include loan notes issued to a shareholder who is about to leave the UK, steps designed to multiply Business Asset Disposal Relief, and changes to share rights designed to meet the Substantial Shareholding Exemption conditions.
How the question has changed in practice
Under the old rules, the starting point was the transaction as a whole. Was the share exchange or reconstruction carried out for bona fide commercial reasons? If a significant part of the motive was tax, the relief could fail for every shareholder above the 5% threshold.
Under the new rules, the starting point is the arrangements. Has anything been included with a main purpose of reducing or avoiding tax? If so, what adjustment is just and reasonable to counteract that advantage, and for whom?
That shift matters in two ways:
- A commercial transaction with an incidental tax benefit, such as deferral, is less likely to be caught, because deferral alone isn't treated as an advantage.
- A commercial transaction with an added feature, such as loan notes for a departing shareholder or a share class created to meet a relief condition, can be caught even though the transaction as a whole is commercial. The counteraction is then aimed at that feature and the person who benefits.
In other words, the rule is narrower in scope but sharper in its targeting.
What it means for demergers
For a typical demerger with genuine commercial aims, the change is broadly helpful. The test is now about whether there are arrangements with a main purpose of reducing or avoiding tax, and HMRC accepts deferral is not in itself a tax advantage.
Two of HMRC's examples are especially relevant:
- Demerger before a sale to an Employee Ownership Trust. A family group uses a capital reduction demerger to separate a business which is then sold to an EOT. HMRC says the rule doesn't apply, because the purpose is to separate the business to be sold and there are no additional arrangements reducing the shareholders' CGT.
- Separating trading and investment activities. HMRC says the rule would not apply where a business is restructured so that a later share sale qualifies for a relief, such as the Substantial Shareholding Exemption, once the relief's conditions have been met throughout the relevant period after the restructuring.
But some things haven't changed:
- The statutory demerger rules in CTA 2010 have their own conditions, including the scheme tests in section 1081, which weren't rewritten.
- The transactions in securities rules still apply to income tax advantages for shareholders.
- Stamp duty and SDLT reliefs still contain a bona fide commercial reasons test.
- Clearance still only covers what is disclosed. HMRC's guidance says a section 138 clearance confirms only that it considers there is no main purpose of avoiding tax on chargeable gains.
Practical points for anyone planning a demerger
- Commercial reasons still matter. They are the best evidence that tax isn't a main purpose, and other reliefs still test them directly.
- Look at the extras. Loan notes, new share classes, cash elements and changes in residence are where the new rule focuses. Each should have a clear explanation.
- Disclose plans after the demerger. A sale or investment is not automatically a problem, but it needs to be explained.
- Clearance first. Clearance under sections 138 and 139(5) remains the way to get certainty before implementation. See HMRC demerger clearances.
Route choice depends on the facts, and the order of the steps matters. We handle demergers end to end, from route and clearance to implementation, under the new rules.
Sources
- Finance Act 2026, sections 37 and 38 (legislation.gov.uk)
- TCGA 1992, sections 137, 138 and 139, as amended (legislation.gov.uk)
- HMRC policy paper, Capital Gains Tax: anti-avoidance for share exchanges and reorganisations, 26 November 2025 (gov.uk)
- HMRC Capital Gains Manual, CG-APP20 (gov.uk)
This article is general information, not advice. Tax rules change and their effect depends on your circumstances. Please speak to us before acting.
