Tax Tribunal considers scope of 'transactions in securities' anti-avoidance rules

In Oscroft and others v HMRC [2026] UKFTT 251 (TC), the First-tier Tribunal (FTT) held that distributable reserves of a wholly-owned subsidiary should be considered when calculating "relevant consideration", in the context of section 685(2), Income Tax Act 2007 (ITA 2007).

Background

Ian Oscroft, Peter Garnett, Paul Wesson and Andrew Kitchen (the Appellants), were shareholders in Whitemeadow Group Holdings Ltd (WMGH) and Whitemeadow Furniture Ltd (WMF).

In December 2010, WMGH acquired the entire share capital of WMF, via a share-for-share exchange. WMGH recognised a merger reserve of £1.83m in its accounts, recognising the difference between the market value of WMF and the nominal value of the new WMGH shares issued.

In February 2016, WMGH agreed to capitalise the £1.83m merger reserve by way of an equivalent bonus issue of shares to the Appellants in the same ratio as their existing shareholdings. WMGH cancelled the shares (and the shares held by the Appellants prior to the merger) and credited the Appellants' loan accounts by £1.86m.

WMGH borrowed £1.86m from WMF to settle the loan accounts and transfer cash to the Appellants. 

The Appellants treated the proceeds as subject to capital gains tax, rather than income tax. HMRC contended that the transactions fell within the transactions in securities anti-avoidance provisions. Following the issuance of counteraction notices and assessments under section 698, ITA 2007, the Appellants notified their appeals to the FTT.

Main issues in the appeal

Relevant consideration (Issue 1)

The parties' dispute as to quantum focussed on the meaning of "relevant consideration", for the purpose of section 685(4), ITA 2007 (as in force before 6 April 2016).

HMRC contended that the distributable reserves of WMF, as WMGH's wholly owned subsidiary, should be taken into account for the purposes of assessing "relevant consideration".

The Appellants disagreed, arguing that the legislation focussed on the distributable reserves of the company directly involved in the relevant transaction and that the reserves of a subsidiary are irrelevant.

Future receipts (Issue 2)

In the alternative, HMRC contended that the consideration received by the Appellants was a debt owed by WMGH to be discharged out of future receipts, thus falling under section 685(4)(b), ITA 2007. The Appellants argued that the consideration they received was credit to their loan accounts and any later detail as to how repayment of those credits was funded did not alter the nature of that consideration. 

WMF as the "close company" (Issue 3)

In the further alternative, HMRC argued that WMF, rather than WMGH, could be the "close company" for the purpose of section 685(2), ITA 2007, on the basis that the statute did not require the close company to be the company whose shares were altered by the transaction. The Appellants contended that the transaction concerned only WMGH, as the consideration received was solely in connection with the cancellation of their shares in WMGH and not in connection with any shares or securities transaction in WMF. 

Time limits (Issue 4)

The parties disputed whether section 698(5), ITA 2007 (as in force until 14 September 2016), established a separate 6-year time limit for raising an assessment in respect of transactions in securities, or whether it simply acted as a cap on the time limit provisions set out in sections 34 and 36, Taxes Management Act 1970 (TMA 1970). 

FTT decision

The appeals were allowed.

Issue 1

The FTT found that assets "available" to a relevant person, must encompass assets which a company controls without third-party involvement and thus the distributable reserves of WMF were amounts which were available to WMGH at the time of the transaction.

Issue 2

In the FTT's view, it would not be "impermissibly broad" to interpret debt consideration in excess of reserves to be funded by unspecified future income, as being received "in respect of future receipts" and thus within the scope of the relevant consideration received.

Issue 3

The FTT agreed with HMRC that the relevant "close company" could be WMF, on the basis that the statutory provision is worded broadly, referring to "a" close company rather than specifically identifying the close company whose securities are involved in the transaction.

Issue 4

The FTT held that the wording of section 698(5), ITA 2007, did not establish a new 6-year time limit. It simply limits HMRC's power to issue an assessment to 6 years, and it cannot rely on the extended 20-year time limit in section 36, TMA 1970. 

Although the FTT concluded that the distributable reserves of WMF were part of the assets available to WMGH for distribution and should be considered when calculating relevant consideration in the context of section 685(2), ITA 2007, as the assessments were raised outside the applicable time limits (which were not extended by the transaction in securities regime), the FTT ultimately found in favour of the Appellants and held that the assessments were invalid.

Comment

This case concerned the transactions in securities legislation before it was amended in 2016. The amendments addressed a number of the key issues considered by the FTT in its decision:  they expressly clarified that a subsidiary's distributable reserves should be included within "relevant consideration"; and they changed the wording of the time-limit provisions such that an assessment can now be made by HMRC "at any time", regardless of any time limit that would otherwise apply.

The FTT's decision is a helpful reminder that wider group reserves should be considered when determining the distributable reserves of a parent company.

The decision can be viewed here.