Upper Tribunal rejects challenge to HMRC counteraction notices over a 2015 capital reduction
Capital reduction ruling by the Upper Tribunal has confirmed that a repayment of capital by an English and Welsh company was not excluded from the transactions in securities legislation applicable at the time.
The Upper Tribunal (Tax and Chancery Chamber) dismissed an appeal brought by the Executors of Paul Hunt, James Hunt and Robert Davis against HM Revenue and Customs (HMRC). The judgment, handed down on 2 September 2026, concerned a capital reduction carried out by Golf Holdings Ltd (GHL) on 22 April 2015.
The case turned on the construction of section 685(6) of the Income Tax Act 2007 as it stood at the relevant time. The provision stated that references in section 685(2)(a) and (b) to assets did not include assets shown to represent a return of sums paid by subscribers on the issue of securities, despite the fact that, under the law of the country where the company was incorporated, such assets were available for distribution by dividend.
GHL cancelled 1,000,000 shares as part of the 2015 capital reduction and credited £10 per share to the appellants’ loan accounts. The consideration amounted to £7,841,000 for Paul Hunt, £1,079,500 for James Hunt and £1,079,500 for Robert Davis.
The appellants treated the consideration as capital on their tax returns and subjected it to Capital Gains Tax. HMRC subsequently issued counteraction notices and assessments under the transactions in securities legislation.
The First-tier Tribunal dismissed the appeals in 2025. The appellants then challenged that decision before the Upper Tribunal, arguing that section 685(6) should be interpreted more broadly and that its reference to section 685(2)(a) and (b) contained a drafting error.
The Upper Tribunal rejected that argument. It held that the reference to section 685(2)(a) and (b) was clear and was not an obvious drafting mistake capable of judicial correction under the principles in Inco Europe Ltd v First Choice Distribution.
The Tribunal also rejected the argument that the words “despite the fact that” meant that all repayments of subscribed capital were excluded from the transactions in securities legislation.
Instead, it agreed with the First-tier Tribunal that the provision was confined to repayments of capital by companies which could lawfully distribute subscribed capital by way of dividend under the law of their place of incorporation.
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That distinction was important in the case because GHL was incorporated in England and Wales. Although GHL had distributable reserves exceeding £10 million at the time of the capital reduction, the Tribunal held that the relevant question under section 685(6) was whether the company could pay a dividend out of share capital and share premium under the law of its place of incorporation.
The Upper Tribunal also rejected an argument that the cash paid to the appellants was itself an asset available for distribution by dividend and therefore brought the capital reduction within the exclusion. It held that the provision focused on assets representing a return of subscribed capital and whether those assets could be distributed by dividend under the relevant company law.
For solicitors advising on historic transactions in securities, the decision underlines the importance of applying the precise statutory wording in force when the transaction took place. The Tribunal noted that the transactions in securities legislation was materially amended by the Finance Act 2016, with those changes taking effect from 6 April 2016.
The Upper Tribunal ultimately agreed with the First-tier Tribunal’s conclusions, although its reasoning differed in some respects. It dismissed the appellants’ appeal and rejected HMRC’s submission that the statutory wording should be corrected as a drafting error.
The judgment was given by Judge Jonathan Cannan and Judge Ashley Greenbank following a hearing at the Rolls Building in London on 4 and 5 June 2026.