Company owners often have a choice about how to take money from their company. However, HMRC may challenge arrangements designed to turn dividend income into a more lightly taxed capital gain.
These rules are known as the transactions in securities rules.
Why do the rules exist?
Dividends can be taxed at up to 39.35%, whereas a capital gain qualifying for Business Asset Disposal Relief may be taxed at 18% in 2026/27.
The rules prevent company owners from using artificial arrangements to access company profits while paying Capital Gains Tax instead of dividend tax.
A simple example
David owns two companies:
- Sunrise Consulting Ltd, which has £1 million of accumulated profits; and
- Oakwood Trading Ltd, which is worth £1 million.
David originally paid £1,000 for his shares in Oakwood Trading Ltd.
Instead of taking a £1 million dividend from Sunrise Consulting Ltd, David arranges for Sunrise to buy his shares in Oakwood for £1 million.
David receives £1 million and reports the payment as proceeds from selling his shares.
Assuming the sale qualifies for Business Asset Disposal Relief, his initial Capital Gains Tax calculation for 2026/27 would be:
| Sale proceeds | £1,000,000 |
| Less: cost of shares | (£1,000) |
| Gain | £999,000 |
| Less: annual exempt amount | (£3,000) |
| Taxable gain | £996,000 |
| CGT at 18% | £179,280 |
If David had simply taken a £1 million dividend, the dividend tax at 39.35% would have been £393,500.
The arrangement has therefore produced a tax saving of £214,220.
Why could HMRC challenge this?
HMRC could argue that:
- David sold shares, so there was a transaction in securities.
- The transaction involved two companies controlled by David.
- Sunrise used its accumulated profits to make the payment.
- A main purpose of the arrangement was to avoid dividend tax.
- David obtained an income tax advantage.
HMRC could then issue a counteraction notice and tax the payment as income, removing the tax advantage.
Interest may also be charged on the additional tax.
What about a genuine company sale?
The rules will not normally apply where the owner genuinely sells the company to an independent buyer and gives up control.
For example, if David sold Oakwood Trading Ltd to an unrelated buyer for £1 million and retained no significant interest in it, there would usually be a genuine change of ownership. The sale should remain subject to Capital Gains Tax, with Business Asset Disposal Relief potentially available.
Can you ask HMRC in advance?
Yes. It is possible to apply to HMRC for advance clearance before completing the transaction.
The application must fully explain the proposed transaction and disclose all important facts. Any clearance can be treated as invalid if relevant information was withheld.
The key point
Selling shares does not automatically mean the proceeds will be taxed as a capital gain.
Where company owners reorganise their companies or use company reserves to purchase their own shares, the transactions in securities rules must be considered carefully. Professional advice—and often HMRC clearance—should be obtained before completing the transaction.
