Transactions in Securities

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Transactions in Securities (TiS) is an HMRC anti-avoidance rule that gives HMRC the power to recharacterise value extracted from a company as income rather than capital. If HMRC concludes that a deal structure has been used to obtain a tax advantage — typically by converting what should properly be an income receipt into a lower-taxed capital gain — it can issue a Counteraction Notice, reversing the tax treatment and taxing the relevant proceeds as income at up to 45%. The rules apply to any transaction involving shares, loan notes, or other financial instruments, not only outright share sales.

What the Rules Do

The Transactions in Securities legislation is set out in Part 13A of the Income Tax Act 2007. Its purpose is to prevent shareholders from using company transactions to extract value at capital gains tax rates when, in HMRC's view, they should be paying income tax on those receipts.

The rules give HMRC the power to issue a Counteraction Notice. This notice recharacterises the relevant receipts as income of the individual, replacing capital gains tax — potentially at 14% with Business Asset Disposal Relief in 2025/26, or 24% at the standard higher rate — with income tax at up to 45%. The financial difference can be substantial. On a £5M gain, a successful counteraction could generate an additional tax liability in excess of £1M.

What Triggers the Rules

The TiS rules apply when three conditions are met: there has been a transaction in securities; the individual has received, or is in a position to receive, a tax advantage as a result; and the main purpose, or one of the main purposes, of the transaction was to obtain that advantage.

HMRC applies these conditions broadly. The most common triggers in an SME exit context include the following.

Pre-sale dividend stripping. Extracting distributable reserves as a dividend before a share sale in order to reduce the company's net asset value — and therefore the headline proceeds subject to capital gains tax — can be challenged if HMRC views the dividend as a pre-ordained step in the transaction rather than a standalone commercial decision.

Phoenixing structures. Selling assets out of a trading company, leaving cash behind in the shell, and then winding up the company to receive a capital distribution is one of HMRC's primary TiS targets.

Specific targeted anti-avoidance rules (TAAR) within the capital distributions legislation also apply to this structure, in addition to TiS.

MBO loan note structures. Where a management buyout is funded partly by loan notes issued to the existing shareholders as deferred consideration, and those notes are structured to produce capital receipts rather than income for the vendors, HMRC may examine whether the structure has a genuine commercial rationale beyond the tax outcome.

The Clearance Process

HMRC operates a statutory clearance procedure for transactions that may engage the TiS rules. Parties to a deal can apply for advance clearance by submitting full details of the proposed transaction to HMRC's Clearance and Counteraction Team. 

If clearance is granted, HMRC will not subsequently issue a Counteraction Notice in respect of that transaction.

Clearance is commonly sought on management buyouts, pre-sale restructurings, and any deal where value is being received in an unusual form. It is not a formality — HMRC will decline to give clearance if the structure is considered to lack genuine commercial purpose — but for transactions with clear commercial rationale, clearance substantially reduces the risk of later challenge.

The clearance must be sought before the transaction completes. HMRC does not grant retrospective clearance, and a counteraction can be raised years after the transaction if HMRC later forms the view that the rules were engaged.

Timing and Pre-Sale Planning

The TiS rules are highly sensitive to timing. Pre-sale restructuring implemented as a direct and immediate step in an anticipated transaction carries substantially higher risk than planning implemented well in advance as part of normal commercial housekeeping. HMRC's primary analytical tool for challenging pre-transaction steps is the Ramsay principle, which treats a series of pre-ordained steps as a single composite transaction for tax purposes. The TiS rules apply to the outcome of that composite transaction, not to each step in isolation.

The practical consequence for founders is that the timing and sequencing of pre-sale planning matters significantly. Actions taken twelve to twenty-four months before an anticipated transaction, with genuine commercial rationale documented at the time, are far harder for HMRC to challenge than equivalent actions taken in the weeks before an LOI is signed.

GRAX Connection

Raise: MBO structures funded partly by vendor loan notes can engage the TiS rules if HMRC takes the view that the notes are structured to produce capital receipts when the underlying return is properly characterised as income. Clearance should be sought on any MBO involving vendor finance where the structure is not straightforward.

Exit: The TiS rules are most acutely relevant at exit. Any transaction structured to extract value at capital rates — through a pre-sale dividend, a phased disposal, or a wind-up distribution — should be assessed against the TiS conditions before the structure is finalised. Where there is any doubt, clearance should be sought before the transaction is executed, not after.

This content is for information only and does not constitute legal, tax, or financial advice. Always take professional advice before making decisions that affect your business or personal tax position.