Transactions in Securities: How HMRC Can Tax Your Capital Gains as Income

Table of Contents

• When Selling Shares Could Trigger an Unexpected Tax Bill

• What Are Transactions in Securities (TIS) and how does HMRC Apply Them?

• Who Is at Risk Under Transactions in Securities HMRC Rules? 

• What Transactions Are Caught by TIS Rules? 

• How to avoid HMRC Applying Transactions in Securities Rules?

• Real-World Examples 

• How Much Tax Could You Owe If HMRC Applies Transactions in Securities Rules?

• Applying for HMRC Clearance 

• Why This Matters?

• Need Expert Guidance? 
  

When Selling Shares Could Trigger an Unexpected Tax Bill

Capital Gains Tax (CGT) is usually better when selling shares unless HMRC applies Transactions in Securities (TIS) rules. Many business owners unknowingly structure transactions that attract HMRC scrutiny and cause HMRC to tax their capital gains as income. This can raise the tax rate from 24% to as high as 45%, creating costly surprises. Learn how TIS rules work and who they affect before planning a sale, liquidation, or share buyback.

What Are Transactions in Securities (TIS)and how does HMRC Apply Them?

The Transactions in Securities (TIS) rule is an anti-avoidance measure in tax legislation. It exists to prevent business owners from converting income (taxed at up to 45%) into capital gains (taxed at up to 24%) when the main purpose is to benefit from the lower tax rate. 

If HMRC believes you structured a transaction primarily to reduce tax, they can reclassify the proceeds as income and issue a much larger tax bill. Typically, a shareholder expects to pay Capital Gains Tax (CGT) upon selling their shares and may even qualify for Business Asset Disposal Relief (BADR). However, if HMRC applies TIS rules, the tax liability could be significantly higher. 

For a deeper dive, explore our full guide on how HMRC can reclassify your capital gains as income under TIS.

Who Is at RiskUnder Transactions in Securities HMRC Rules?

TIS rules mainly apply to close companies, which are typically small, family-run businesses where shareholders are connected (e.g., spouses, family members, or business partners). 

If you’re a shareholder in a close company, it’s essential to understand how Transactions in Securities HMRC rules might apply to you even unintentionally.

What Transactions Are Caught by TIS Rules?  

HMRC applies TIS rules when they suspect a transaction was designed primarily to reduce tax rather than for genuine commercial reasons. Some common transactions that may trigger TIS scrutiny include: 

• Share Buybacks – If a company repurchases shares from a shareholder using its profits, HMRC may tax the proceeds as a dividend rather than capital gains. 

• Company Liquidation – If a company is wound up and distributes funds as capital gains instead of dividends, HMRC may challenge the tax treatment. 

• Share Transfers Between Connected Parties – Selling shares to a spouse or family member at a discount or with special rights can attract scrutiny. 

• Changes to Share Rights – Altering voting rights or dividend entitlements to benefit certain shareholders may be seen as tax avoidance. 
  

How to avoid HMRC Applying Transactions in Securities Rules?

HMRC is less likely to challenge transactions when a fundamental change in ownership takes place. A fundamental change is typically one in which the original shareholders retain less than 25% of the company. 

Genuine Commercial Reasons Exist – Transactions due to retirement, shareholder disputes, or business restructuring are less likely to be taxed as income. 

Advance Clearance from HMRC – You can apply for pre-approval to confirm whether your transaction will be taxed as capital gains or income. 

Real-World Examples  

Example 1: Husband and Wife Selling Shares  A husband and wife own a close company and sell shares to a newly formed entity they control. They expect to pay CGT at 18-24%, possibly reduced to 14% with Business Asset Disposal Relief (BADR).  HMRC’s Response: Since they still retain control of the company after the sale, HMRC may tax the proceeds as income (up to 45%) instead. 

Example 2: Share Buyback Instead of Dividends  A company has large cash reserves and wants to return money to shareholders. Instead of paying dividends (which are taxed as income), the company opts to buy back shares, aiming to pay CGT instead. HMRC’s Response: If they view the buyback as an attempt to convert taxable income into lower-taxed capital gains, they may apply TIS rules and tax the payment as income.

Example 3: Liquidating a Company to Avoid Dividend Tax  A company is wound up, and instead of paying dividends to shareholders, the remaining funds are distributed as capital gains.  HMRC’s Response: If HMRC believes the liquidation was done primarily to avoid paying dividend tax, they may apply TIS rules and tax the distribution as income instead. 

How Much Tax Could You Owe If HMRC Applies Transactions in Securities Rules?

If HMRC applies TIS rules, they only tax the part they believe should be income, not the full transaction.

HMRC may argue cash-rich companies should have paid dividends, raising tax from 18–24% CGT to 45% income tax.

Cash-rich businesses risk HMRC recalculating tax based on reserves, which can result in unexpected and costly tax assessments.

Applying for HMRC Clearance 

The safest way to avoid unexpected tax assessments is to apply for advance clearance from HMRC before completing the transaction. HMRC will review the details and confirm whether they will tax the transaction as capital gains or income.

To strengthen your case, ensure you have: 

• Board minutes and documentation explaining the commercial reasons for the transaction. 

• Evidence of ownership changes showing that the seller and their associates no longer control the company. 

• Clear business justification for the transaction beyond tax savings. 
  

Learn exactly how to apply for advance clearance and what documents HMRC expects to see.

Why This Matters?

If HMRC applies TIS rules, they may replace your expected 18–24% CGT with Income Tax of up to 45% a costly mistake for business owners.

Need Expert Guidance?

If you’re planning a share transaction, securing HMRC clearance is the safest way to avoid unexpected tax bills.

Avoid painful tax surprises get in touch with our expert team for bespoke advice before making your next move.

Meet Omar Omar is a Chartered Tax Advisor (a.k.a an expert on tax issues) and founder of ASWATAX. He regularly shares his knowledge and best advice here in his blog and on other channels such as LinkedIn. Book a call today to learn more about what Omar and ASWATAX can do for you.

*Disclaimer: ASWATAX is a firm of Chartered Tax Advisors, and we strive to provide accurate, up-to-date tax insights. Tax laws may change, so this content is for general guidance only and not a substitute for professional advice. Seek independent tax and legal counsel before making decisions. ASWATAX is not liable for any loss from reliance on this information. Use at your own risk.