Buyback to bank EIS relief is not a TIS income-tax purpose, appeal court holds

The Court of Appeal has dismissed HMRC's appeal in The Commissioners for HMRC v Hugh Edward Mark Osmond & Anor [2026] EWCA Civ 1440Nationalarchives, holding that a main purpose of securing Enterprise Investment Scheme (EIS) disposal relief on a share buyback is not, as a matter of law, a main purpose of obtaining an income tax advantage under the transactions in securities (TIS) rulesNationalarchives. Lady Justice Falk gave the lead judgment, with Lord Justice Newey and Lady Justice Elisabeth Laing agreeing, upholding the Upper Tribunal ([2025] UKUT 183 (TCC))Nationalarchives. Judgment was handed down on 12 November 2026.

The taxpayers subscribed for shares in Xercise Ltd between 1996 and 1998 in circumstances qualifying for EIS relief, later preserving it through a share-for-share exchange into Xercise2 Ltd. In March 2015 the company bought back their shares for £20 millionNationalarchives (£11 million for Mr Osmond, £9 million for Mr Allen), prompted by concern that EIS disposal relief — under which gains on qualifying EIS shares are not chargeable gains — might be withdrawn after a change of government. The consideration was set not to exceed a return of capital. HMRC issued counteraction notices assessing the £20 million to income tax under the TIS rules.Nationalarchives The First-tier Tribunal upheld the assessments ([2024] UKFTT 378 (TC))Nationalarchives, accepting that the admitted EIS-relief purpose was an income-tax-advantage purpose as a matter of statutory logic; the Upper Tribunal reversedNationalarchives.

The Court of Appeal held the Upper Tribunal was right.Nationalarchives Section 684(1)(c) of the Income Tax Act 2007 requires a main purpose of obtaining an income tax advantage as defined in section 687Nationalarchives — broadly, the excess of income tax that would be payable if the consideration were a qualifying distribution over any capital gains tax payable, or the income tax where no capital gains tax is payableNationalarchives. An intention to achieve a nil capital gains tax bill does not equate to intending that differential, in which income tax is the all-important feature.Nationalarchives Purpose must be distinguished from effect: the First-tier Tribunal found as fact that the income tax advantage was a consequence of the buybacks rather than a main purposeNationalarchives, that extraction of value was not a purposeNationalarchives, and that no part of the consideration was chargeable to income tax apart from the TIS rulesNationalarchives. Treating the EIS purpose as an income-tax purpose would deem a purpose the taxpayers did not have.

History reinforces that reading. The regime dates from 1960, before capital gains tax existed, and presupposes a contrast between receipts accruing tax-free and a taxable receipt. The Finance Act 2010 reforms narrowed the rules and introduced the quantified section 687 definition to clarify amounts; the 2009 consultation gave no hint of extending them to capital gains tax avoidance and confirmed they target income converted into capital, not capital into income. Counteraction here would also have charged materially more than the capital gains tax feared — beyond neutralising an advantage, which is what the Chapter's overview provision describes.

It was common ground that the buybacks were transactions in securitiesNationalarchives, that condition A in section 685(2) was metNationalarchives, that the fundamental-change-of-ownership exclusion in section 686 did not applyNationalarchives, and that an advantage as defined was in fact obtainedNationalarchives — so only the purpose condition was in issueNationalarchives. Advisers receiving such a notice should pin the dispute to the facts about purpose and use the advance clearance procedure before transactingNationalarchives. Legal basis: Part 13 Chapter 1 of the Income Tax Act 2007 (sections 682 to 687), the Finance Act 2010 Schedule 12 reforms, and section 150A(2) of the Taxation of Chargeable Gains Act 1992.