Tax Insights

Merger and Acquisitions – Rollover clearances

Under the Capital Gains Tax (CGT) share reorganisation rules, chargeable gains arising from certain reorganisations of share capital, share exchanges and company reconstructions can be “rolled over” into the new shares or debentures acquired as part of the transaction, deferring any liability to tax on chargeable gains until the new shares or debentures are disposed of. These provisions are known as the “rollover relief” provisions. They are key to preventing UK tax residents from incurring a “dry” tax liability on a corporate acquisition to the extent that they decide to swap their existing holding for new equity or debt instruments issued by the bidder, or where an existing group reorganizes its holding structure.

The rollover relief provisions relating to share exchanges and schemes of reconstruction are subject to an anti-avoidance rule. In its unamended form, the rule allows relief only if the exchange or scheme of reconstruction in question is (i) effected for bona fide commercial reasons; and (ii) does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to CGT or corporation tax. This rule has only applied for shareholders who own more than 5 per of the target (or of a class of shares in the target).

If there are relevant shareholders who could be affected, it is often the case that clearance from HMRC is applied for before the exchange of shares to confirm whether relief is going to be denied on these grounds.

The Government is widening the anti-avoidance provision so that it will apply to “arrangements relating to an exchange or scheme of reconstruction” where the main purpose, or one of the main purposes, of the arrangements is to “reduce or avoid” liability to CGT or corporation tax. Similar amendments will be made to the anti-avoidance provision relating to reconstructions involving the transfer of business (section 139(5) TCGA 1992).

This broadens the rule in two respects. First, it captures arrangements whose main purpose includes the reduction (not only the avoidance) of liability to CGT or corporation tax. Second, it extends the nexus of the rule to arrangements “relating to” an exchange or scheme of reconstruction, potentially bringing within scope a wider set of steps connected to the transaction. The previous rule only applied where there was an overall arrangement having the tax motive.

The proposed changes will reinforce HMRC’s interpretation of the rule, which has been challenged in a number of recent cases decided against HMRC. Most notably, in Delinian Ltd (formerly Euromoney Institutional Investor Plc) v HMRC [2023] EWCA Civ 1281 the Court of Appeal held that although tax avoidance was a purpose of the arrangements, it was not a main purpose. By expanding the rule to cover arrangements “relating to” the exchange or scheme of reconstruction and by expressly providing that the anti-avoidance rule will apply where there is a main purpose to “reduce” liability, the amendments to the anti-avoidance rule are intended to deny rollover relief for arrangements that may previously have fallen outside its scope. The draft legislation also introduces a discretionary element, allowing HMRC to make “just and reasonable” adjustments in response to any reduction or avoidance, and to disapply rollover relief where appropriate. The scope of what HMRC may regard as “just and reasonable” remains uncertain, though this will hopefully become clearer through future guidance and practice.

The Government is also repealing the minority shareholder carve-out, which disapplied the anti-avoidance rule for shareholders that do not hold more than 5% of any class of shares or debentures in the company being disposed of. The anti-avoidance provision will now apply to all shareholders, regardless of the extent of their shareholding.

These changes apply to an issue of shares or debentures made on or after 26 November 2025, unless a clearance application was received by HMRC before that date. If it was, there is a transitional rule which means that the old rules will apply provided the exchange takes place within 60 days of HMRC notifying the company that clearance has been given. For many transactions, completion will be likely to take place after that date, if for instance the transaction is dependent on regulatory or anti-trust clearance. In such cases, shareholders will need to decide whether to reapply for clearance in order to obtain confirmation that under the new and widened anti-avoidance regime, relief will be available. If clearance is denied after a binding contract is signed with the buyer, negotiations may need to be revisited and buyers may still insist on an equity element. The same dynamic arises if clearance was not applied for on the basis that all the shareholders owned less than 5 per cent (as would often be the case for takeovers of listed entities). Now that the rules have been expanded to cover such shareholders, the parties may consider applying for clearance.

Going forward, it is more likely that clearance will be applied for. This may have an impact on the timing of transactions. Clearances can take up to 30 days and it would make sense in many cases to do so before any contract is signed or in the case of a public company takeover, before the circular is issued.

Major Infra-structure projects

The Chancellor has reaffirmed the Government’s commitment to delivering on one of the pledges in its corporation tax roadmap – a new service providing ‘advance tax certainty’ for major UK projects. The Government has published its response to the consultation held between March and June 2025, which outlines the eligibility criteria, scope and processes of the new service which is due to commence in July 2026. In terms of the broad outline of the scheme:

1. Who can apply? – the service will be available to both UK and non-UK taxpayers in connection with ‘major projects’ in the UK – a new investment which is not a continuation of ordinary spending. Applications can be made jointly, e.g. by co-investors, or by a single taxpayer.
2. What is the financial threshold? – there is a £1bn financial threshold based on UK project expenditure on fixed and intangible assets, less financing costs and equity expenditure in other businesses or entities, with the intention for this position to be reviewed after 12 months.
3. Which taxes are in scope? – corporation tax, VAT, stamp taxes, PAYE and the construction industry scheme are all within scope of the new service.
4. Are clearances binding? – any clearances issued will bind the Government on its interpretation of the law based on a full disclosure of the relevant facts to HMRC.

The introduction of the service will be welcome news to taxpayers – particularly international investors who may be familiar with similar services provided in other jurisdictions and less familiar with the system in the UK. Many aspects of the scope and operation of the service will remain subject to a review process taking place 12 months following its introduction. Some of the key areas that we would expect the review process to focus on, in terms of delivering value to taxpayers, are:

1. Financial threshold – this closes the door on projects that, while not meeting that financial threshold, are nonetheless of vital importance to UK infrastructure more widely, or which provide significant levels of UK job creation.
2. Scope – clearances will not bind HMRC where there is either a change of law via legislation, or where subsequent case law confirms the application of the law differently to HMRC’s previously held view. This may limit the value taxpayers are able to derive from the service given areas of genuine uncertainty (e.g. availability of plant and machinery allowances in the context of infrastructure and energy projects), or which are subject to current change (e.g. HMRC’s challenges to the deductibility of business expenses and financing costs), may not be within scope.
3. Term – clearances are valid for five years. For large infrastructure projects this will likely represent only a fraction of the total duration of the project, covering construction, operation and decommissioning. Clearances may therefore need to be applied for on multiple occasions over the life of a project, albeit potentially via a more streamlined process after the initial clearance has been issued.

HMRC approach

The usefulness of the clearance process will depend on the approach of HMRC to the process. It will be important that HMRC take a sensible approach on matters, rather than adopting the lowest position it is likely to accept, especially on matters such as availability of capital allowances.

Changes to capital allowances regime – swings and roundabouts

The Budget contained measures changing how UK capital allowances work in two main ways. First, from 1 April 2026 the main rate of capital allowances will be reduced from 18% to 14%.  Second, an additional first year allowance has been made available in certain circumstances meaning that businesses may be able to claim a first-year allowance of 40% on certain expenditure incurred after 1 January 2026. Overall, this is seen as a revenue-raising measure, meaning that the reduction in rate has a greater impact than giving access to the new first-year allowance.

Overall, it is anticipated this will benefit most equipment lessors (other than those who lease cars) but will increase the tax burden on businesses with existing capital allowances pools, who will have a lower rate of tax depreciation from 2026 onwards.

Background to UK capital allowances

Capital allowances are the way the UK gives tax relief for depreciation of capital assets and has historically been used to create incentives to invest by offering rates of depreciation that exceed the tax depreciation rate. Capital allowances are available on a reducing balance basis for investments in plant and machinery, which covers a wide range of assets from moveable equipment such as ships, aircraft, trucks and tools to expenditure on infrastructure projects such as windfarms and battery storage plants.  For most of this century, capital allowances have been available at two main rates which have most recently been 18% and 6% for assets with useful lives of less than and over 25 years respectively.

Since 2021, and in order to encourage investment following the Covid-19 pandemic, the Government introduced a first-year allowance of 100% for certain types of expenditure. This has been preserved as what is known as “full expensing”. However, full expensing has only been available for expenditure by companies and has not been available in a number of circumstances, including where the asset was used for leasing. This created a distortion in the market as a business which incurred expenditure on plant and machinery for its own business using borrowed money would be able to write off the entirety of that expenditure in the year it is incurred, whereas a business that chose to use lease finance to acquire the same asset would effectively only obtain the benefit of capital allowances at 18% as this is the rate available to the lessor, which would be factored into the lease rentals. 

Summary of the changes

The main rate of capital allowances will be reduced from 18% to 14% from 1 April 2026 (for companies) and 6 April 2026 (for other businesses). Where an accounting period of a business straddles those dates, the rate to be used will be a blended rate reflecting the two.

A new 40% first-year allowance will be made available for businesses incurring expenditure on plant and machinery assets with an expected useful life of 25 years or less. Where this applies, the business will be able to claim relief for 40% of its expenditure in the first year and then will claim relief on the remaining balance at the 14% rate for subsequent years. This first-year allowance will be available to non-corporate businesses such as partnerships and LLPs which were not previously able to claim the benefit of full expensing and will also be available for businesses that intend to lease the asset in question and are therefore not eligible for full expensing. The rules will be subject to restrictions for overseas leasing activity, or where there is an attempt to claim the first-year allowance through an avoidance transaction.

The key factor for lessors will be the scope of the new overseas leasing rules.  These rules provide that the new 40% allowance will only be available in circumstances where, broadly, leased plant and machinery is used to earn income which is wholly or almost wholly within the charge to UK tax or which, in the case of a UK-resident lessee is not used (to a significant extent) to earn income from a non-UK source which is outside the charge to UK tax, including in circumstances where that is because relief from tax is available under a double tax treaty or unilateral credit arrangements. For lessors of most small- and medium-ticket assets, these conditions should be relatively easy to satisfy and monitor, meaning this rule should be manageable in practice; however it remains to be seen what view HMRC will take of where the line is drawn on whether an asset is “almost wholly” earning income within the charge to UK tax.

The first-year allowance will not be available for expenditure on cars. This is likely to mean that, overall, lessors of cars will be worse off as a result of these measures as they will only be able to claim 14% capital allowances in the future on their expenditure and will be unable to benefit from any of the accelerated depreciation measures otherwise available.

Our conclusion

This is a welcome measure for most of the leasing community and results from HMRC working group discussions that have been taking place since the previous Government was in power. The measure proposed for leasing is relatively straightforward and does not create significant additional compliance burdens, which is also welcome. However, those businesses that have already invested significant sums in assets reflected in their main rate pool will feel the pain of the reduction in the main rate of capital allowances which, at 14%, is lower than it has ever been. Lessors will need to examine the new legislation in detail to ensure they comply with the requirements to obtain the new 40% first-year allowance and, for assets that may be used overseas, care will need to be taken not to trigger any anti-avoidance provisions.

Finally, we note that these measures do not affect the main question facing investors in major infrastructure and energy projects in the UK, which is whether their expenditure will qualify for tax relief at all.  There have been many cases in recent years where HMRC have challenged the availability of capital allowances on elements of projects such as hydro-electric plants, offshore windfarms, nuclear plants, ports and other infrastructure projects.  Many other countries will allow full relief for such expenditure over time, and it is something of an anomaly that claims by UK businesses for tax relief on genuine business expenditure on infrastructure projects is challenged.

Transfer Pricing, Permanent Establishments and Diverted Profits Tax (DPT)

HMRC has confirmed wide-sweeping changes to be made to transfer pricing, permanent establishment and the diverted profits tax. They have also confirmed the introduction of a standardised reporting framework for cross-border related party transactions. The latter will increase the compliance burden for many international groups with a UK presence.

These changes were consulted on earlier in the year, and are generally expected to be applicable to periods beginning on or after 1 January 2026.

The key changes are:

• Abolition of the diverted profits tax (DPT) to be replaced by an underassessed transfer pricing profits (UTPP) concept that will fit within corporation tax. This makes it clearer that any tax payable under the regime falls within the scope of double tax treaties (and importantly, allows for access to the relevant Mutual Agreement Procedure). This amendment will be significant for those entities that have carried out analyses under the existing DPT framework which will likely need to be refreshed to ensure that the new rules give the same result.
• Within the UK’s domestic permanent establishment (PE) rules:
  • Amendment of the definition of a dependent agent PE (DAPE) to mirror the OECD treaty definition under which there is a DAPE where “a person acting on behalf of the company habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts, that are routinely concluded without material modification by the company”.
  • Wide-sweeping changes to the investment management exemption including the removal of the “20% rule”, the expansion of the scope of investment transactions and changes to the accompanying HMRC guidance on the “independent capacity” or “substantial services” test by reducing the threshold where HMRC will consider an investment management business to be independent from 70% to 50% of a relevant investment manager’s business.
• A number of changes to the transfer pricing rules including changes to the “participation” and “acting together” tests, an exemption for UK-UK transactions (subject to wide exclusions where entities are not subject to the same statutory rate of tax) and legislation on the treatment of implicit and explicit guarantees. There is thought to be no change to the SME exemption based on HMRC’s response to the consultation.
• The introduction of reporting under an International Controlled Transactions Schedule (ICTS) which will be subject to further technical consultation but with a targeted introduction date for accounting periods beginning on or after 1 January 2027.

These changes are likely to impact all cross-border businesses with a UK element. Arrangements for which an analysis has been carried out under the old DPT will need to be reconsidered under the new rules. Whilst the PE definitional change may not be significant practically, the changes to the IME are considerable and will require scrutiny to see how they impact existing and new structures. The exemption for UK-UK transfer pricing will ease some of the compliance burden but this is likely to be off-set by the reporting requirements under the new ICTS.

Three-year stamp tax holiday for new UK Stock Exchange listings

With effect for new UK listings on or after 27 November 2025, transfers of shares will be exempt from 0.5% UK stamp duty reserve tax (SDRT) for a three-year period from the date of listing.

How will the exemption apply in practice?

This measure will apply to new listings on a regulated market, such as the London Stock Exchange’s Main Market (the ‘Main Market’). (Shares admitted to AIM, or the AQSE Growth Market, are already exempt from SDRT.) The changes are not relevant to companies whose securities already trade on a UK regulated market as the exemption is targeted specifically at new listings on or after 27 November 2025.

HMRC’s published guidance on SDRT has been updated to account for this measure, and provides further details of the exemption, including information on certain restrictions. In terms of the scope of this exemption, there are a number of points to be aware of:

• The exemption will only apply to the basic 0.5% charge and it will not apply to the higher 1.5% rate for transfers into depositary receipt systems or unelected clearance services (although transfers of depositary receipts themselves will be exempt). Many such transfers may however be exempt if the new listing raises new capital (under the so-called capital raising arrangement).
• The exemption will not apply if there is a change of control of the relevant company, either by way of takeover or merger, regardless of whether the shares acquired under the change of control would otherwise have benefitted from the exemption as the 3-year window has not yet expired.
• The exemption will only remove the charge to SDRT, which is generally charged on shares held in dematerialised form, and not the charge to stamp duty (in relation to shares held in certificated form), although this is not expected to have a material impact on the efficacy of this measure.
• If a company already has bonds listed in the UK, this should not prevent the exemption applying to any shares of the same company which are newly listed on a regulated market.
• Once in the post-listing period the exemption will apply to all of the company’s securities (not just shares).

The announcement is designed to encourage corporates to list their shares on a UK regulated market, rather than avoiding the UK altogether and listing elsewhere, such as NASDAQ or NYSE where no stamp tax applies.  This is a welcome step although it is disappointing that it will not apply on a takeover of the newly listed company. The measure may also benefit non-UK incorporated companies that would otherwise need to issue depositary interests in order for their shares to trade via CREST, relying on the foreign securities exemption and requiring the shares to be listed on a recognised stock exchange (which in the case of the London Stock Exchange, requires a listing on the Official List).

New rates of income tax for property rental income – impact on REITs and PAIFs

The changes to rates of income tax on property rental income, increasing the basic, higher and additional rates by 2% with effect from 6 April 2027, will impact investors in Real Estate Investment Trusts (REITs) and Property Authorised Investment Funds (PAIFs), as the rate of withholding on distributions will rise from 20% to 22%.

The increased 22% withholding rate will have cost implications for investors who cannot receive distributions gross, and has cash flow implications for investors or structures that rely on making double tax treaty relief.  The ultimate rate of withholding tax will depend on the relevant double tax treaty and so may not, in practice, give rise to an actual increased withholding. Taking Jersey as an example of a jurisdiction that is commonly used in REIT structures, the UK Jersey double tax treaty can reduce the rate of withholding for property income to 15%, and this 15% rate will remain unaffected by the 2% increase (albeit there can be a cash flow implication).

The rate of withholding on payments of rental income to non-UK resident landlords will also increase to 22% with effect from 6 April 2027, although in practice non-resident landlords typically have approval from HM Revenue & Customs to be able to receive rental income gross, and so the cash flow impact here is expected to be less material.