Introduction: Why Transactions in Securities Matter to American Owners
The transactions in securities rules are a UK anti-avoidance regime that lets HMRC tax money you take out of a close company as if it were a dividend, at up to 39.35%, even though you structured it as a capital receipt taxed at 18% or 24%. They sit in Chapter 1 of Part 13 of the Income Tax Act 2007. For a British owner-manager, they are a familiar hazard on any sale, buyback or reorganisation. For an American who owns a UK company, however, they are far more expensive than they look.
The reason is the US return. A US citizen or green card holder in London pays UK tax on the exit and then reports the same gain to the IRS. In most cases, UK capital gains tax already exceeds the US tax on that gain. Consequently, any extra UK tax HMRC imposes under the transactions in securities rules is almost never offset by a US foreign tax credit. It is a pure additional cost.
This guide explains how the regime works in 2026, which common transactions it catches, how the statutory clearance procedure protects you, and how counteraction interacts with your US filing. At TaxYork, we prepare US and UK returns for company owners, investors and senior executives, so we see these deals from both sides of the Atlantic.
What the Transactions in Securities Rules Actually Do
The transactions in securities rules do not create a new tax. Instead, they allow HMRC to counteract an income tax advantage. In plain terms, HMRC compares the capital gains tax you actually paid with the income tax you would have paid had the money reached you as a distribution. It can then assess the difference.
Section 684 of the Income Tax Act 2007 sets four conditions. You must be party to one or more transactions in securities. The circumstances must fall within section 685 and not be excluded by section 686. The main purpose, or one of the main purposes, must be to obtain an income tax advantage. Finally, you or another person must actually obtain that advantage.
Why American Owners Face a Different Calculation
A British seller who suffers counteraction pays more tax, and the story ends. An American seller pays more UK tax but receives no matching US relief, because the US credit is capped at the US tax on the gain. Furthermore, the IRS characterises the same receipt under its own rules, which rarely match HMRC's. Therefore, the planning question for an American is not simply whether HMRC might counteract, but what a counteraction would cost once both returns are finished.
How the Transactions in Securities Rules Work in 2026
The modern transactions in securities regime dates from Finance Act 2010, with significant changes made by Finance Act 2016 for transactions from 6 April 2016. HMRC's view of the rules is set out in the Company Taxation Manual at CTM36800.
What Counts as a Transaction in Securities
The definition of transactions in securities is deliberately wide. Section 684(2) covers a transaction "of whatever description" relating to securities, including buying, selling or exchanging shares, issuing new shares, and altering share rights. Additionally, since 2016 it expressly includes a repayment of share capital or share premium and a distribution in a winding up.
In practice, almost every owner-manager exit involves transactions in securities within this meaning. A share sale, a share-for-share exchange into a new holding company, a company purchase of own shares, a capital reduction and a liquidation all qualify. Consequently, the real filters are the other conditions, not the definition.
The Close Company Conditions
Section 685 limits the regime to circumstances involving close companies. Under Condition A, you receive relevant consideration in connection with the distribution, transfer or realisation of a close company's assets, and you do not pay income tax on it. Relevant consideration broadly means value representing assets available for distribution by way of dividend.
Condition B covers cases where two or more close companies are involved and you receive consideration in the form of shares or securities representing such assets. Importantly for Americans, HMRC's manual at CTM36820 confirms that a close company includes a company that would be close if it were UK resident. Therefore, a UK-resident American who owns a Delaware corporation can face the transactions in securities rules too.
The Income Tax Advantage
Section 687 defines the advantage as the excess of the income tax that would be payable if the consideration were a distribution over the capital gains tax actually payable. For 2026-27, UK dividend tax rates are 10.75%, 35.75% and 39.35%, while the higher rate of capital gains tax is 24%. Business Asset Disposal Relief now gives 18% on up to £1 million of lifetime gains, as GOV.UK explains.
The counteracted amount is capped at what could have been paid to you, or an associate, as a distribution at the time. For this purpose, HMRC treats a company's reserves as increased by the distributable reserves of its subsidiaries. Consequently, a thinly capitalised holding company above a cash-rich trading subsidiary offers no protection.
The Main Purpose Test and the Fundamental Change of Ownership Exclusion
Two provisions decide most transactions in securities cases in practice: the main purpose test and the exclusion for a fundamental change of ownership.
The Main Purpose Test After Osmond
HMRC must show that obtaining an income tax advantage was the main purpose, or one of the main purposes, of the transaction. This is a question of fact about your purposes, judged on the evidence. In Wroe v HMRC [2022] UKFTT 143 (TC), three directors of an engineering company exchanged their shares for ordinary and preference shares in a new holding company, which then bought back £600,000 of preference shares from each of them. A contemporaneous letter from their accountants comparing dividend tax with capital gains tax proved fatal, and HMRC won.
By contrast, in Osmond and Allen v HMRC [2025] UKUT 183 (TCC), a transactions in securities appeal, the Upper Tribunal allowed the taxpayers' appeals. Relying on the Court of Appeal in BlackRock HoldCo 5, it drew a clear line between the purpose of a transaction and its effect. A tax advantage that follows inevitably from a commercial transaction is not necessarily one of its main purposes. Nevertheless, the lesson from both cases is the same: contemporaneous documents decide these disputes.
The Fundamental Change of Ownership Exclusion
Section 686 excludes the transactions in securities rules where there is a fundamental change of ownership of the close company. For transactions from 6 April 2016, that means that after the transaction, the original shareholders and their associates do not hold more than 25% of the ordinary share capital, more than 25% of the distribution rights, or more than 25% of the votes.
This exclusion protects a genuine sale to an unconnected buyer. However, it fails the moment the sellers retain a meaningful stake. For example, a private equity deal in which founders roll over 30% or 35% of their value into the buyer's structure sits outside the exclusion. In that case, the main purpose test decides whether the transactions in securities rules bite.
Transactions HMRC Targets
HMRC's manual gives examples of cases where clearance is unlikely. One is a share-for-share exchange into a new holding company at a large premium, followed by a reduction of that share premium paid out in cash. Another is a husband selling his shares to a company controlled by his wife for cash or loan notes, funded from distributable reserves.
In our experience, the transactions that catch American owners most often are internal sales to a new holding company for cash or debt, buybacks that fail the purchase of own shares conditions, and pre-sale arrangements that move company cash to the seller as sale proceeds. Each converts retained profit into a capital receipt. Therefore, each needs careful analysis before signing.
Common Transactions for American Owners
Every exit route an American owner considers raises its own transactions in securities questions. The four below account for most of our work.
Share Buybacks and the Residence Condition
A purchase of own shares by an unquoted trading company can receive capital treatment under section 1033 of the Corporation Tax Act 2010. However, the conditions are strict, including five years of ownership, a substantial reduction in your interest and, critically, UK residence in the year of purchase. Our guide to a UK share buyback for American owners explains these rules and the US section 302 tests.
Where the buyback qualifies for capital treatment, HMRC will normally also consider the transactions in securities position. Accordingly, advisers usually apply for clearance under section 1044 and section 701 in one letter.
Holding Company Insertions
Inserting a new holding company above your trading company is common before a sale or when bringing in investors. On its own, a share-for-share exchange is usually cleared, and the transactions in securities rules rarely trouble it. However, if the new holding company pays you cash or issues you loan notes, the transactions in securities rules come into play. Our article on the UK holding company and the American founder covers the separate US cost of that step under section 367.
Private Equity and Management Buyouts
In a buyout, sellers typically take cash for part of their shares and roll the rest into the buyer's structure. If the buyer's cash comes partly from the target's own reserves, or the sellers keep more than 25%, the deal needs clearance. Our guides to a management buyout for the American seller and the management incentive rollover explain the US side of the rollover itself.
Liquidations and the Separate Winding-Up Rule
Since 2016, a distribution in a winding up is itself a transaction in securities. Moreover, a separate targeted anti-avoidance rule in section 396B of the Income Tax (Trading and Other Income) Act 2005 can treat a liquidation distribution as income where you continue a similar trade within two years. Our guide to a members voluntary liquidation for American shareholders explains that rule, which has no clearance procedure.
The Clearance Procedure Under Section 701
The single most valuable protection against the transactions in securities rules is statutory clearance. It is free, fast and binding, provided you disclose everything.
How to Apply
Under section 701 of the Income Tax Act 2007, you send HMRC particulars of the proposed transactions and ask it to confirm that no counteraction notice ought to be served. HMRC's guidance on applying for statutory clearance explains that applications go to the Clearance and Counteraction Team, usually by email to reconstructions@hmrc.gov.uk, with attachments under 2MB.
Your application should list every statutory provision under which you seek clearance, a step-by-step description of the transactions, the commercial reasons, the shareholdings before and after, all connections between the parties, the latest accounts and the form of consideration each shareholder receives. HMRC also asks for alternative transactions you considered and why they were unsuitable. A combined application covering sections 138, 1044 and 701 is normal.
The 30-Day Timetable
HMRC must respond to a transactions in securities clearance application within 30 days of receiving it. If it needs more information, it must ask within that 30-day window. You then have 30 days to reply, or the application lapses, and HMRC has a further 30 days from your reply to decide. In practice, a clean application for a commercial deal is often answered well within the statutory time.
Where the transaction is market sensitive, such as one involving a listed company or a well-known individual, you should mark the application accordingly. HMRC then restricts the number of people who handle it.
What Clearance Protects, and What It Does Not
Under section 702, once HMRC grants clearance, it cannot serve a counteraction notice on those transactions. However, the protection is void if you did not fully and accurately disclose every material fact. HMRC's manual at CTM36845 describes this as coming with "all cards face up on the table".
HMRC gives no reasons when it grants clearance, but it does give reasons when it refuses. Importantly, there is no appeal against a refusal. A refusal is not a counteraction notice either. Instead, it signals that HMRC may act if you proceed, so you can restructure, proceed and accept the risk, or reapply with further facts.
Counteraction Notices, Time Limits and Disputes
If you proceed without clearance, or on incomplete disclosure, HMRC can open an enquiry and counteract the advantage. Understanding the procedure helps you judge the real risk.
The Enquiry and the Counteraction Notice
For transactions from 6 April 2016, section 695 allows an HMRC officer to notify you of an enquiry at any time up to six years after the end of the tax year to which the income tax advantage relates. If the officer determines that section 684 applies, section 698 requires the advantage to be counteracted by adjustments set out in a counteraction notice. An assessment made under that notice is not subject to the normal time limits.
Only the Clearance and Counteraction Team can issue transactions in securities counteraction notices. Consequently, the risk does not come from a routine enquiry into your Self Assessment return alone. Nevertheless, a dormant six-year window is a long time for an exit to remain open.
The Oscroft Time-Limit Decision
For older transactions, the time limit is contested. In Oscroft and others v HMRC [2026] UKFTT 251 (TC), the First-tier Tribunal held that counteraction assessments for pre-2016 transactions had been made out of time, because the general four-year limit then in force applied. The taxpayers won on that point, although they lost a separate argument about subsidiary reserves. However, commentators agree that the post-2016 legislation clearly provides a six-year window, so Oscroft helps only historic cases.
Challenging a Counteraction Notice
You can appeal against a transactions in securities counteraction notice, and a disputed case ultimately goes to the First-tier Tribunal. Our guide to a tax tribunal appeal for Americans in Britain explains the process. Importantly for Americans, disputed UK tax is not creditable on the US return until the dispute ends, so the timing of payment matters on both sides.
The US Side: Why Counteraction Costs Americans More
This is where transactions in securities planning for an American differs from planning for a British owner. The US rules do not follow HMRC's recharacterisation, and the foreign tax credit rarely absorbs the extra tax.
The IRS Sees a Capital Gain
For US purposes, a sale of shares normally produces a capital gain, taxed at up to 20% plus the 3.8% net investment income tax. A counteraction notice does not change that US character. The IRS applies its own rules, including section 302 for redemptions and, where you own 10% or more of a controlled foreign corporation, section 1248, which can itself treat part of the gain as a dividend. The IRS instructions for Form 1116 govern how the UK tax is then credited.
Under section 865(g)(2) of the Internal Revenue Code, a US citizen living abroad sources a gain on personal property abroad only if foreign tax of at least 10% of the gain is actually paid. UK tax at 18% or 24% clears that bar comfortably, so the gain is normally foreign-source and the UK tax is creditable, subject to the limitation.
The Foreign Tax Credit Ceiling
The credit cannot exceed the US tax on the same income. On a long-term gain taxed at 20%, UK capital gains tax at 24% already exceeds the US charge. Moreover, the capital gain rate differential adjustment on Form 1116 scales foreign-source gains taxed at 20% by 0.5405, which shrinks the limitation further. In addition, the net investment income tax generally cannot be reduced by foreign tax credits under the Code.
Consequently, if HMRC counteracts and replaces 24% with 39.35%, the extra UK tax has nowhere to go on the US return. It becomes an excess credit, carried back one year and forward ten, which a high earner with UK-taxed income may never use. The IRS guidance on the foreign tax credit explains the carryover rules.
Timing: Counteraction Years Later
A transactions in securities counteraction notice can arrive years after the sale. When it does, the extra UK tax is a change to foreign tax already reported. Under section 905(c), that change must be reported, and under section 6511(d)(3) you generally have ten years to claim any additional credit. While you contest the notice, the disputed tax is not creditable at all, unless you pay it and elect a provisional credit under Treasury Regulation 1.905-1.
US Corporations Owned From Britain
Because a non-UK company counts if it would be close when UK resident, the transactions in securities rules can reach a UK-resident American's US corporation. A sale of a Delaware corporation to a new holding company, or a redemption funded from its retained earnings, can therefore attract UK counteraction as well as US tax. HMRC treats a US limited liability company as opaque, so a US LLC can raise the same issue. Our US tax returns for expats service reviews these structures before any extraction.
Leaving Britain Does Not Solve It
Moving back to the United States before extracting value is a common instinct. However, a non-UK resident cannot obtain capital treatment on a buyback under section 1034. Moreover, the temporary non-residence rules can bring close company distributions back into UK charge if you return within five years. Therefore, relocation is a planning factor, not an exit route.
Case Study: A Private Equity Exit Cleared in 23 Days
The following illustrative case study shows how transactions in securities clearance protects an American seller. The names and some details are changed, but the numbers reflect the deals we see.
The Facts
Daniel is a US citizen who has lived in London for eleven years. He owns 40% of a UK software company alongside two British co-founders, so the company is not a controlled foreign corporation. A private equity buyer agreed to acquire the company through a new Topco and Bidco structure. Each founder would take cash for most of their shares and roll the rest into Topco, leaving the founders together with 35% of Topco's ordinary shares.
Daniel's stake was worth £6 million. He would receive £3.9 million in cash and roll £2.1 million into Topco shares. Part of the cash was funded by Bidco drawing on the target's surplus cash after completion.
Why Transactions in Securities Clearance Was Essential
Because the founders kept 35%, the fundamental change of ownership exclusion failed. Moreover, cash funded from the target's reserves looked like relevant consideration under Condition A. Therefore, the whole deal depended on the main purpose test.
We prepared a combined application under section 138 of the Taxation of Chargeable Gains Act 1992 and section 701 of the Income Tax Act 2007. It set out the commercial rationale, the arm's-length negotiation with an unconnected buyer, the shareholding table before and after, and the alternatives considered. HMRC granted clearance 23 days after receiving it.
The Numbers on Both Returns
On the UK side, Daniel's £3.9 million cash gain attracted Business Asset Disposal Relief at 18% on the first £1 million, costing £180,000, and 24% on the remaining £2.9 million, costing £696,000. His UK capital gains tax was therefore £876,000. Had HMRC counteracted and taxed the cash as a dividend at 39.35%, the UK bill would have been £1,534,650, an income tax advantage of £658,650.
On the US side, the gain of roughly $5.2 million produced US tax of about $1.04 million at 20%, plus about $198,000 of net investment income tax. His UK tax of £876,000, around $1.17 million, already exceeded the regular US tax, leaving an excess credit and the net investment income tax payable. Consequently, a counteraction would have added £658,650, about $876,000, of UK tax with no US relief whatsoever.
The Outcome
With transactions in securities clearance in hand, Daniel completed with certainty on both returns. We reported the gain on Form 8949 and Form 1116, tracked the excess credit carryover, and analysed the Topco rollover separately for US purposes. Finally, we kept the clearance letter and application on file, because clearance protects only the facts disclosed.
How TaxYork Can Help
The transactions in securities rules can turn a well-planned exit into an expensive one, and for American owners the cost falls almost entirely on the UK side of the ledger. We provide comprehensive US and UK tax preparation and compliance for company owners, so we model both returns before you sign.
Before the Transaction
We review the proposed deal against sections 684 to 687, identify whether the fundamental change of ownership exclusion applies, and quantify the potential income tax advantage. In particular, we model the US foreign tax credit position, including the rate differential adjustment and any section 1248 exposure. Where needed, we prepare the combined clearance application covering every relevant provision.
After Completion
We prepare the UK Self Assessment and US returns that report the exit consistently, including Form 8949, Form 1116, Form 5471 where relevant, and the FBAR and Form 8938 disclosures for sale proceeds held abroad. Our FBAR and FATCA compliance service keeps those accounts reported under the FinCEN FBAR rules. If HMRC later opens an enquiry, we align the dispute with your US filings from the start.
Conclusion
The transactions in securities rules let HMRC tax a capital exit from a close company as income, at up to 39.35%. They apply to a wide range of deals, including buybacks, holding company insertions, private equity rollovers and liquidations, and they can reach a US corporation owned from Britain.
For an American owner, counteraction is especially costly, because the US foreign tax credit rarely absorbs the extra UK tax. Therefore, the right approach is to plan the deal, document the commercial purpose and obtain clearance under section 701 before completion. Handled that way, the transactions in securities regime becomes a formality rather than a six-year risk.
Contact Us
If you are planning a sale, buyback, reorganisation or liquidation of a UK or US company, speak to us before you sign. Book a consultation with our US-UK specialists to review the transactions in securities position on both returns. You can also email hello@taxyork.com or call 020 3488 8606.
Disclaimer
This article provides general information about the transactions in securities rules for US citizens, green card holders and other cross-border owners of UK and US companies. It does not constitute tax or legal advice for your specific circumstances. UK and US tax rules change frequently, and the case study is illustrative only. You should obtain professional advice based on your own facts before acting. TaxYork accepts no liability for decisions taken on the basis of this article alone.