Setting up a holding company

Share exchanges after Finance Act 2026: the new main purpose test

From 26 November 2025 a main purpose test replaced the bona fide commercial reasons test for share exchanges. What changed and what it means for a holdco.

By Omar Aswat CTA · 7 October 2026

Setting up a holding company

For years, the question HMRC asked about a share-for-share exchange was whether it was done "for bona fide commercial reasons". That test has gone. For shares issued on or after 26 November 2025, the question is now whether the arrangements have a main purpose of reducing or avoiding capital gains tax or corporation tax.

The change was made by section 37 of the Finance Act 2026, which received Royal Assent on 18 March 2026. It sounds technical. For most owner-managers putting a holding company over a trading company for genuine reasons, it changes the framing of the advice rather than the answer. But it removes some old protections, and it makes the detail of the wider plan matter more.

How a share exchange works

When a new holding company (HoldCo) acquires your trading company (TradeCo), it issues its own shares to you in exchange for your TradeCo shares. Under section 135 of the Taxation of Chargeable Gains Act 1992 (TCGA), and section 127 which it applies, there is no disposal for capital gains tax. Your HoldCo shares are treated as the same asset as your old TradeCo shares, with the same base cost and acquisition date.

Section 137 has always been the anti-avoidance backstop to that relief. Section 138 lets you ask HMRC, before the shares are issued, to confirm that section 137 won't apply. See our share-for-share exchange page for the mechanics.

What changed on 26 November 2025

	Old section 137 (shares issued before 26 November 2025)	New section 137 (shares issued on or after 26 November 2025)
The test	Exchange not effected for bona fide commercial reasons, or part of a scheme with a main purpose of avoiding tax	Arrangements have a main purpose, or one of the main purposes, of reducing or avoiding CGT or corporation tax
Small holders	Holders of 5% or less of the target were outside the rule	No small-holder protection
Consequence	Relief denied	Just and reasonable adjustments to counteract the advantage, which can include disapplying the relief so far as required
"Arrangements"	Not defined in the same way	Any agreement, understanding, scheme, transaction or series of transactions, legally enforceable or not

Two shifts matter most.

The focus moves from the exchange to the arrangements around it. Under the old test, a commercially driven exchange could pass even if a tax-saving feature was bolted on. HMRC's policy paper says the aim was to make the anti-avoidance rules more effective by targeting arrangements where a tax advantage is a main purpose, rather than looking only at the overall purpose of the reorganisation.

The counteraction is targeted. HMRC can make adjustments to counteract the advantage for the person concerned, rather than the whole exchange failing for everyone.

A parallel change for reconstructions that transfer a business (section 139) was made by section 38 of the same Act, from the same date.

What HMRC say is not caught

HMRC's guidance in their Capital Gains Manual (CG-APP20) is helpful on the boundaries:

Deferral on its own isn't an advantage. The rule doesn't apply where the only advantage is deferral consistent with the purpose of the share exchange rules. Deferral is what section 135 is for.
Preparing for a relief isn't avoidance. Restructuring so that a later sale qualifies for a relief, such as the substantial shareholding exemption (SSE), is not caught where the conditions for that relief are actually met throughout the period after the restructuring.
Income tax is a separate question. HMRC's long-held position is that section 137 concerns tax on chargeable gains. Income tax risks are dealt with under the transactions in securities rules.

The examples HMRC give of arrangements that are caught involve extra features: loan notes timed to be redeemed after the holder emigrates, and a transfer of shares to a spouse shortly before a sale so that a second Business Asset Disposal Relief (BADR) lifetime limit could be used.

What it means for inserting a holding company

Most holding companies are inserted for reasons like these:

moving surplus cash out of the trading company's risk (see protecting cash in a holding company);
separating property into its own company;
adding a second business under the same group;
tidying ownership ahead of succession.

None of those has the reduction or avoidance of capital gains tax as a main purpose. The deferral that comes with the exchange isn't an advantage in itself. So the core question for a straightforward insertion is the same as it always was: what is the holding company for, and is the plan around it what it appears to be?

Where care is needed:

A sale on the horizon. If a buyer is already in view, the reasons for a holding company and the planned use of the proceeds need setting out fully. Some pre-sale steps are fine. Others, like moving shares between spouses to multiply reliefs, are close to HMRC's own examples.
Different consideration for different people. Loan notes, different share classes or cash for some shareholders change the picture and need specific thought.
Steps that follow the exchange. Because "arrangements" now covers any series of transactions, what happens after the exchange (dividends, loans, a liquidation, an emigration) can be part of the analysis.
Minority shareholders. The 5% safe harbour has gone. Small holders exchanging on identical terms are unlikely to be a concern, but they no longer sit outside the rule automatically.

Clearance still matters, perhaps more

Section 138 clearance survives, reworded so that HMRC confirm the exchange will be made "without arrangements" to which the new section 137 applies. It must be obtained before the shares are issued, and it relies on full disclosure.

It still covers capital gains only. A share exchange that leaves value accessible in the company can raise income tax questions under the transactions in securities rules (Part 13 of the Income Tax Act 2007). Inserting a holding company above the same shareholders is not a "fundamental change of ownership", so that exclusion doesn't help. That's why most applications combine section 138 and section 701 clearance in one letter to HMRC's Clearance and Counteraction Team, which replies within 30 days. See HMRC clearances and our clearance timeline planner.

HMRC also say it is open to taxpayers to self-assess where they think the rule applies. In practice, for a holding company insertion, we normally recommend clearance.

What hasn't changed

The relief itself. The conditions in section 135 (more than 25% of the target's ordinary share capital, or a general offer for control, or the greater part of the voting power) are the same.
Stamp duty. Share acquisition relief under section 77 of the Finance Act 1986 still uses a bona fide commercial reasons test, requires the consideration to be only shares and the shareholdings to mirror the old company, and needs HMRC adjudication. See stamp duty on a holding company.
Transitional cases. If a section 138 application was made before 26 November 2025 and HMRC confirmed they were satisfied, the old rules continue where shares were issued before 26 January 2026 or, if later, within 60 days of HMRC's notification.

Practical steps

Write down the commercial reasons for the holding company before anything else, and make sure the plan genuinely matches them.
Map every step, including what you intend to do with cash, property and shares afterwards.
Treat a known or likely sale as a fact to disclose, not something to leave out.
Apply for section 138 and section 701 clearance together, and don't issue the shares until both are back.
Claim stamp duty relief through adjudication as a separate step.

We have obtained 100% of the HMRC clearances we have applied for (50+ applications). If you are planning a share exchange under the new rules, book a call and we respond the same working day.

This article is general information, not advice. Tax rules change and their effect depends on your circumstances. Please speak to us before acting.

The clearance timeline. Clearance under s138 TCGA 1992 (capital gains) and s701 ITA 2007 (income tax) is usually requested in one letter to HMRC's Clearance and Counteraction Team. HMRC must reply within 30 days, or ask for more information within 30 days and then decide within 30 days of the answer. Shares must not be issued until clearance is in hand. After the exchange, the stock transfer form goes to HMRC so stamp duty relief can be adjudicated.

FAQs

Frequently asked questions

Does the Finance Act 2026 change stop me inserting a holding company?

No. Share-for-share exchange relief still exists and still defers capital gains tax when a new holding company issues shares to acquire your trading company. What changed is the anti-avoidance test that sits behind the relief. Since 26 November 2025, HMRC can counteract the relief if the arrangements have a main purpose of reducing or avoiding capital gains tax or corporation tax. A holding company inserted for genuine reasons, such as protecting cash or adding a second business, is not the target.

My shares were issued in December 2025. Which version of section 137 applies to me?

Usually the new one. The Finance Act 2026 rules apply to arrangements involving an issue of shares or debentures on or after 26 November 2025. The old bona fide commercial reasons test only continues if a section 138 clearance application was made before 26 November 2025, HMRC confirmed it was satisfied, and the shares were issued before 26 January 2026 or, if later, within 60 days of HMRC's notification. Anything else issued from 26 November 2025 falls under the main purpose test.

Is getting a tax deferral from a share exchange now treated as avoidance?

No. HMRC's guidance says the new rule does not apply where the only advantage is a deferral of tax that is consistent with the purpose of the share exchange rules. Deferral is the whole point of section 135, so simply not paying capital gains tax on the day you swap your shares for holding company shares is not the kind of advantage the rule attacks. The question is whether extra features have been built in to reduce or avoid tax beyond that deferral.

I own 3% of the company. Am I still protected from the anti-avoidance rule?

Not automatically. Under the old rules, a shareholder holding 5% or less of the target company was outside the anti-avoidance test. Finance Act 2026 removed that protection, so small shareholders are now covered by the same main purpose test as everyone else. In practice a minority shareholder who simply exchanges shares on the same terms as the others is unlikely to be caught, but the automatic safe harbour has gone and the arrangements as a whole are what matter.

What does a section 138 clearance confirm under the new rules?

A section 138 clearance now confirms that HMRC are satisfied the exchange will be made without arrangements to which the new section 137 applies. It covers capital gains only. HMRC's guidance says it confirms their view that there is no main purpose of avoiding tax on chargeable gains. It does not cover income tax, which is why most applications also ask for clearance under section 701 of the Income Tax Act 2007 for transactions in securities. Clearance must be obtained before the shares are issued.

Can HMRC reverse my share exchange relief years later under the new test?

If the main purpose test applies, HMRC can make just and reasonable adjustments to counteract the advantage, which can include disapplying share exchange relief so far as needed, by assessment or by amending an assessment. That is why clearance before the shares are issued matters. A clearance obtained on full and accurate disclosure gives certainty for capital gains purposes. Without one, you rely on your own assessment that the arrangements had no main tax-avoidance purpose, and HMRC could challenge that later.

Does the main purpose test also apply to stamp duty on a share exchange?

No. The Finance Act 2026 change was to the capital gains rules in section 137 of the Taxation of Chargeable Gains Act 1992. Stamp duty share acquisition relief under section 77 of the Finance Act 1986 has its own conditions, and it still contains a bona fide commercial reasons test, alongside requirements that the consideration is only shares and that shareholdings mirror the old company. The relief has to be claimed through HMRC's adjudication process, so it is handled as a separate step.

Should I wait for more HMRC guidance before inserting a holding company?

There is no need to wait if your reasons are clear. The legislation is in force, HMRC's Capital Gains Manual already contains guidance and examples on the new test, and the clearance procedure works as before, with HMRC replying within 30 days. Waiting can cost you: the two-year periods for Business Asset Disposal Relief and Business Relief, and the twelve-month holding period for the substantial shareholding exemption, all run from when the structure is in place.

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