What does section 137 of the Taxation of Chargeable Gains Act 1992 do?

Section 137 denies the tax-neutral treatment normally available under sections 135 and 136 for share-for-share exchanges and schemes of reconstruction. It applies where the transaction is not carried out for genuine commercial reasons or forms part of arrangements with a main purpose of avoiding capital gains tax or corporation tax.

Who is exempt from the section 137 restriction on share exchanges?

Minority shareholders holding no more than 5% of the shares or debentures of any class in the target company are exempt from the section 137 restriction. However, shares or debentures held by connected persons are aggregated with the shareholder's own holding when determining whether the 5% threshold is exceeded.

Can HMRC recover unpaid tax from someone other than the original shareholder under section 137?

Yes. If tax assessed under section 137 remains unpaid for six months, HMRC can pursue any person who currently holds the shares or debentures, provided those shares were only ever transferred on a no-gain/no-loss basis, such as between spouses, civil partners, or group companies. The assessment must be raised within two years.

Can a person assessed for another's unpaid tax under section 137 recover the amount paid?

Yes. Any person who pays tax under the section 137 recovery provisions has a statutory right to reclaim the full amount paid, together with any interest incurred, from the original chargeable person whose tax liability gave rise to the assessment. This ensures the ultimate economic burden falls on the correct taxpayer.

Taxation of Chargeable Gains Act 1992 section 137

Restriction on application of sections 135 and 136

Section 137 restricts the tax-free treatment normally available on share-for-share exchanges and schemes of reconstruction, where the transaction is not carried out for genuine commercial reasons or has a tax avoidance purpose.

The tax-neutral treatment under sections 135 and 136 is denied unless the share exchange or reconstruction is carried out for genuine commercial reasons and is not part of arrangements aimed at avoiding capital gains tax or corporation tax.
Shareholders holding 5% or less of the shares or debentures in the target company are exempt from this restriction, though shares held by connected persons count towards the 5% threshold.
If tax arising from the denial of relief remains unpaid for more than six months, HMRC can pursue any person who currently holds the shares or debentures — provided they were acquired through a no-gain/no-loss transfer (such as between spouses, civil partners, or group companies) — for the outstanding tax.
A person who pays tax on behalf of the original chargeable person under these recovery provisions has the right to reclaim the amount paid, plus any interest, from that chargeable person.

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