Monday, 9th February 2026

Think Twice: Why Giving Away Shares Could Increase Your Tax Bill

For entrepreneurs, the sale of a business is the culmination of years of hard work. To reward this, the UK tax system offers Business Asset Disposal Relief (BADR) – formerly known as Entrepreneurs’ Relief (ER)—which reduces the Capital Gains Tax (CGT) rate on qualifying gains. The extent of that reduction has changed several times in recent years[1].

A recent ruling in the Upper Tribunal case of Philip Cox and Debra Cox v HMRC [2026] UKUT 00007 (TCC) serves as a reminder that a gift of shares, when a business sale is anticipated, can jeopardise this valuable relief. It is also a useful illustration of how, sometimes, good behaviour can bring an unfavourable outcome.

The Fatal Mistake: Dilution Below 5%

To qualify for BADR, a shareholder must meet the “personal company” test under Section 169S(3) Taxation of Chargeable Gains Act 1992 (TCGA 1992). This rule requires that for a period of at least two years leading up to the sale, the individual must hold:

• At least 5% of the ordinary share capital.
• At least 5% of the voting rights.
• At least 5% of the economic interest (profits and assets upon winding up).

In the Cox case, Mr & Mrs Cox each held roughly 6.4% of the shares in their company, David Williams IFA Holdings Ltd (DWIFA). They attended meetings where the 5% requirement was discussed and confirmed that they met it. However, shortly before the sale in 2019, they gifted a portion of their shares to other shareholders.

These gifts reduced their individual holdings to approximately 4.1%. When the company underwent a restructure a few months’ later, the couple sold their remaining shares and claimed ER. HMRC disallowed the claim. The result? An additional tax bill of over £210,000 and combined penalties exceeding £32,000 for the incorrect claim to relief.

The Penalty Paradox: Why “Good” Taxpayers Pay More

The most significant takeaway from the Cox case concerns the suspension of penalties, which was the key issue before the Upper Tribunal, the underlying BADR error having been already conceded and determined at the First- Tier Tribunal stage.

Under Paragraph 14 of Schedule 24 to the Finance Act 2007, HMRC has the discretion to “suspend” a penalty. They can do this where there has been a careless inaccuracy, if they can set conditions that help the taxpayer avoid future mistakes. If the taxpayer complies with these conditions for a set period, the penalty may be suspended.

The Coxes argued their penalties should be suspended because they were diligent taxpayers who had simply made a one-off “oversight”. However, the Upper Tribunal upheld HMRC’s refusal to suspend, confirming a frustrating paradox:

1. Specific Conditions Required: A suspension must be tied to a condition that corrects a behavioural flaw.
2. The “One-Off” Barrier: Because the Coxes were already highly compliant and the error occurred during a unique, complex event (the sale of a business), HMRC argued there were no “measurable” conditions they could set that would improve the Coxes’ future behaviour.
3. Judicial Review Standard: The Tribunal confirmed it could only overturn HMRC’s refusal if the decision were “flawed” in a legal sense (irrational or ignoring evidence). Since HMRC followed its own guidance, the penalties stood.

Counterintuitively, a history of clean tax compliance appears to have damaged the Coxes’ claim for suspension.

Essential Takeaways for Shareholders and Advisers

The Cox case highlights three critical lessons:

1. Keep the 5% rule in mind: Gifting even a tiny fraction of shares can be fatal to a BADR claim if it tips you below the 5% mark. The 5% rule is a “bright line” test; there is no leniency for being close (e.g., 4.9%).
2. Seek continuous advice: The Coxes relied on advice given at a meeting before they changed their shareholding. Crucially, the Tribunal found they were “careless” because they failed to seek fresh advice once the facts changed (i.e., after the gift).
3. Do not rely on a clean record: Do not assume that a clean tax history will protect you from paying penalties. If a mistake is a “one-off” and your systems are already perfect, HMRC may argue there is nothing to “fix,” and therefore no grounds to suspend the penalty.

The Bottom Line: If you are planning to gift shares—whether for succession planning or employee incentives—verify the impact on your Section 169S TCGA 1992 status immediately before and after the transfer. As the Coxes discovered, a few percentage points can be the difference between a 10% tax rate and an expensive lesson in tax law.

If you have any queries regarding this note or require further information about anything covered in it, do get in touch with Alex Shah or Henry Braithwaite in our specialist Private Client team or your usual contact at the firm on +44 (0)20 7526 6000.

This article is for general purpose and guidance only and does not constitute legal advice.  It should not replace legal advice tailored to your specific circumstances.

[1] In the tax year 2025/26, the reduced rate is 14%. Previously, it was 10%. From 6 April 2026, it will be 18%.