On 2 September 2026 the Upper Tribunal released The Executors of Paul Hunt & Ors v HMRC [2026] UKUT 342 (TCC). The appeal failed. A 2015 capital reduction that credited roughly £10 million to shareholder loan accounts stayed inside the transactions in securities (TIS) regime, and HMRC’s counteraction notices stood.
Primary sources: the full UT decision, the underlying FTT decision Hunt & Ors v HMRC [2025] UKFTT 538 (TC), Chapter 1, Part 13 of the Income Tax Act 2007 (as it stood for the relevant years), HMRC’s Company Taxation Manual on TIS, the detailed clearance practice notes, the statutory clearance process, Simmons & Simmons on main purpose versus inevitable effects, and the related purpose case Osmond and Allen.
If you run close companies, PE holdcos, family groups or any board paper that still treats “return of capital” as a clean CGT event by default, read this as an operating risk note — not a niche technical curiosity.
What actually happened
Golf Holdings Ltd (GHL) was a close company. In 2002 it acquired three Northern Ireland trading subsidiaries. The appellants’ shares went in by share-for-share exchange: £1 par, £9 to share premium. About £32.9 million sat in share premium. In March 2010 GHL cancelled 1,000,000 shares and repaid £10 per share. On 22 April 2015 it cancelled another 1,000,000 shares and credited £10 per share to the shareholders’ loan accounts with GHL — £7,841,000 to Paul Hunt, £1,079,500 each to James Hunt and Robert Davis. Percentage ownership did not change. GHL had more than £10 million of distributable reserves. The appellants returned the consideration as capital subject to CGT.
HMRC opened the TIS file in 2018, issued s695 notices in December 2021, and after the statutory declaration process issued counteraction notices and assessments in April 2022. The FTT dismissed the appeals in May 2025. The UT has now done the same.
Before the FTT the appellants accepted that if section 685 applied, the remaining conditions for counteraction were met — including main purpose and income tax advantage. The fight was almost entirely about whether s685(6) took the capital reduction outside condition A.
The two construction fights — and why both failed
Condition A in the then s685(2) bites where, as a result of a transaction in securities, a person receives “relevant consideration” in connection with the distribution, transfer or realisation of assets of a close company and does not otherwise bear income tax on it. “Relevant consideration” includes value that is or represents assets available for distribution by way of dividend (s685(4)).
Section 685(6) then said that references in s685(2)(a) and (b) to assets “do not include assets which are 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 in which the company is incorporated assets of that description are available for distribution by way of dividend.”
Two questions went up:
- Drafting error? HMRC argued the cross-reference to s685(2) was a clear mistake and should be read as pointing at the “relevant consideration” definition in s685(4), relying on the House of Lords correction principles in Inco Europe. Both the FTT and the UT refused. The words were not so defective that the tribunal could rewrite them.
- Blanket capital exclusion? The taxpayers argued “despite the fact that” meant “even where,” so all returns of subscribed capital fell outside condition A. HMRC said the phrase meant the exclusion only operated where foreign company law itself allowed those subscribed sums to be paid as a dividend. The UT agreed with HMRC’s narrower reading. The historic purpose of the exclusion was to level the field for companies whose place of incorporation treated capital as distributable — not to give UK limited companies a free pass on every repayment of share capital or premium.
Disposition at [131]–[132] is blunt: the UT agrees with the FTT’s conclusions (on different reasoning), accepts the result is neither party’s preferred “level playing field,” and still refuses to rewrite clear statute. Appeal dismissed. HMRC’s Respondents’ Notice on the drafting error also fails.
Why this still matters after Finance Act 2016
The capital reduction sat in the awkward FA 2010 window: TIS in the form that applied from 24 March 2010 until the FA 2016 rewrite took effect on 6 April 2016. FA 2016 reworked the exclusion (now framed around returns of sums paid by subscribers “merely because” foreign law treats them as distributable) and made clear that repayments of share capital and share premium can sit inside the regime. The UT’s history appendix walks that arc from FA 1960 through ICTA and ITA.
Hunt is not pure “today’s wording.” It still matters because:
- Open enquiries and historic extractions from 2010–2016 still turn on this text.
- The pattern — holdco, share exchange inflating premium, later capital reduction into loan accounts, CGT assumed — remains common in family and PE structures.
- If you concede purpose and advantage once s685 is in play, you are fighting on a narrow statutory island.
- Purpose wins such as Osmond and Allen on EIS crystallisation do not rescue a case that never gets past condition A.
HMRC still treats capital reductions that extract value available for distribution as high-risk TIS territory. Clearance under s701 ITA 2007 is voluntary; “we thought it was capital” is not a defence.
What every CFO should lock this week
1. Map open capital extractions. List every capital reduction, share premium repayment, buy-back, redemption or loan-account credit from close companies in the last decade where individuals treated receipts as capital. Flag anything in the FA 2010–FA 2016 window and anything still inside enquiry or discovery reach.
2. Stop treating “return of capital” as self-executing CGT. Companies Act mechanics and tax characterisation are not the same. If the company had distributable reserves at least equal to the extraction, expect HMRC to argue relevant consideration under the TIS code even where the corporate law label is capital.
3. Put statutory clearance on the deal checklist. For live or planned reductions, buy-backs and reconstructions involving close companies and individual shareholders, run BAI Clearance under s701 with full cards-up disclosure — share tables before/after, reserves, commercial purpose, alternatives considered, prior clearances. Incomplete facts void comfort.
4. Separate purpose papers from construction papers. Osmond helps on subjective main purpose versus inevitable income effect. Hunt shows that construction of condition A can end the case before purpose is even contested. Board minutes and adviser notes should address both tracks explicitly.
5. Watch loan-account credits. Crediting a director/shareholder loan account is still “receipt” for these purposes when the capital reduction lands. Staggered cash drawdown later does not push the tax point. GHL’s instalment repayment agreements did not help.
6. PE / holdco hygiene. Share-for-share exchanges that inflate share premium, followed by later capital returns to managers or founders, need a TIS memo at both steps. Do not rely on “premium is capital” folklore. Align with management incentive, leaver and waterfall papers so the tax characterisation matches the economics the investment committee approved. For group distributions context more broadly, keep HMRC’s TIS circumstance guidance and the Companies Act 2006 capital reduction framework in the same pack — company law labels do not decide the income tax result.
7. Estate and executor risk. Paul Hunt’s executors were on the appeal. Large capital extractions that sit unresolved at death become estate administration and cash problems, not just personal tax files. Flag open TIS exposure in death-in-service and succession packs.
Practical board questions
- Which close-company extractions in the group were reported as capital without s701 clearance?
- For each, did distributable reserves cover the amount extracted?
- Was main purpose documented commercially, or only as “tax efficient extraction”?
- Are any HMRC information requests, s695 notices or counteraction threats open?
- Do current Articles, shareholder agreements and PE investment agreements force capital reductions that need pre-clearance before completion?
If any answer is weak, commission a short forensic schedule before the next audit committee — amounts, dates, reserves, returns filed, adviser opinions, and clearance status.
Bottom line
Hunt [2026] UKUT 342 is a construction decision with operational teeth. The Upper Tribunal will not stretch s685(6) into a general safe harbour for repayments of subscribed capital by UK companies, and it will not rewrite the cross-reference to save either side’s preferred coherence. For CFOs, the durable lesson is simpler than the statutory history: capital reductions out of close companies with real reserves remain prime TIS territory; CGT treatment is a conclusion you earn with facts, purpose evidence and preferably clearance — not a label you attach because the board minutes said “return of capital.”
Lock the open extractions, put s701 on the checklist, and stop assuming share premium is a tax shield.
Tanous advises PE-facing CFOs on tax, cash and governance. This note is general information, not advice on any specific transaction.