Finance Act 2026: M&A Tax Highlights

With effect from 26 November 2025 (the date of Budget 2025), the Government broadened the anti-avoidance provisions applying to share-for-share exchanges and schemes of reconstruction. This is particularly important for private equity transactions and other deals involving management 'rollover structures', where the share reorganisation rules are central to transaction structuring.

The capital gains share reorganisation rules (contained in the Taxation of Chargeable Gains Act 1992) apply in scenarios where new shares are issued to a person in exchange for shares already held in another company. The rules create two statutory 'fictions': the no disposal fiction, and the single continuous asset fiction. Where the rules apply, the shareholder is treated as not having disposed of the original shares; the original shares and the new holding are treated as the same asset. The effect is that any 'gain' at the time of the share exchange is ignored, or 'rolled over', deferring the calculation of the gain, and any capital gains tax until the new shares are eventually disposed of.

The new version of the rule is intended to codify HMRC's interpretation of the anti-avoidance provisions as argued in several cases (including Wilkinson² and Delinian (formerly Euromoney)³). The cases had been decided against HMRC on the basis that the wider arrangements, taken as a whole, did not have tax avoidance as a main purpose. 

For M&A transactions, the practical significance is that the new wording can capture not just the share exchange (or scheme of reconstruction) itself, but any transaction or series of transactions related to it. The potential result is that even within a wider, commercially justifiable transaction, the rule can apply to discrete arrangements carried out by individual parties. 

When the changes were first announced, there was nervousness around the possible increased risk of challenge on M&A transactions involving management rollover structures. However, HMRC have since clarified (in published guidance⁴) that they will accept that the anti-avoidance provisions will not apply where the advantage consists solely of the deferral of a CGT liability that is fully in accordance with the purpose of the relevant capital gains rules. The new HMRC guidance also explicitly confirms that standard management rollover arrangements, structured to allow management shareholders a degree of choice in their investment, should not be caught by the new anti-avoidance rules.  

It is worth re-emphasising that the effect of the anti-avoidance rule being applied has also changed. The old version simply disapplied the reorganisation treatment entirely, whereas the new rule will allow HMRC to adjust on a "just and reasonable basis" to counteract the tax advantage sought. While HMRC have confirmed that only the shareholders obtaining a tax advantage will be affected, and will only be impacted in a proportionate way, all shareholders hoping to rely on reorganisation treatment will now need to consider the possible application of the rule.  

From a deal perspective, parties should expect greater scrutiny of how rollover and reconstruction steps are documented and explained. It is now more important to evidence the commercial rationale for each step in the structure, rather than looking at the commerciality of the deal as a whole. Buyers and investors may also wish to probe more carefully in diligence as to whether any pre-transaction steps could attract a challenge from HMRC, particularly where different shareholder groups are achieving materially different tax outcomes. In deals involving, for example, newly introduced holding structures into which shareholders are intended to 'roll' their shares, it may also be prudent to seek clearance from HMRC as to the non-application of the anti-avoidance provisions. This subtle change has introduced complication and, in some cases, delay to deal timelines.

FA 2026 also introduced a new 40% first-year allowance (FYA) for expenditure incurred on certain plant and machinery assets on or after 1 January 2026. In a very welcome move, HMRC confirmed that the new allowance will also be available to the UK leasing sector (previously excluded from accessing accelerated FYAs) and to both incorporated and unincorporated businesses. The new FYA was, however, introduced alongside a reduction in the main rate of plant and machinery writing-down allowances (WDA) from 18% to 14%.

From an M&A perspective, the rate reduction for WDA for plant and machinery is unwelcome for capital-intensive businesses. The reduction in rate increases the effective tax burden on plant-heavy businesses because the allowable deduction for depreciation on capital assets is lower each year and spread over a longer period. This is impacting valuation negotiations on deals because buyers are seeking to reduce the value ascribed to businesses with significant ongoing plant and machinery expenditure. On the other hand, the new 40% first-year allowance provides a significant benefit to businesses acquiring assets for leasing, potentially offering an enhanced cash flow boost (and increased deal flow) in the leasing sector for the first time.

It is worth noting that the UK's capital allowances regime is an area that is likely to experience further change in the coming year, especially in the area of pre-development costs (following the Ørsted⁷ case and consequential HM Treasury consultation⁸).