Changes planned for modernising company taxation on capital distributions

HMRC have opened a consultation, ‘Modernising the taxation of distributions and repayments of capital from companies’. They are seeking views on proposals to modernise the tax framework dealing with distributions made by companies to shareholders who are individuals or trusts.

The consultation explains that there are seven areas of the distribution rules where HMRC consider that the legislation has not kept pace with commercial practice. It has remained largely unchanged since Corporation Tax was introduced in 1965. These are:

• Reduction of capital.
• Demergers.
• Income Tax treatment of distributions from non-UK resident companies.
• Interaction between debt, loans and the distributions legislation.
• Loans and other temporary extractions from non-UK resident companies.
• Purchase of own shares rules.
• Updated capital extraction anti-avoidance in respect of Transactions in Securities (TiS).

Financial or commercial extractions that do not fall within Income Tax (IT) often result in capital distributions, which are instead subject to Capital Gains Tax (CGT). This affects both the amount of the extraction that is taxed and the tax rate at which it is charged. The result is that economically similar payments to a shareholder can be taxed inconsistently. The proposed changes seek to address this.

Proposals

The consultation proposes that share buybacks and other returns of capital will reflect a ‘frozen’ amount of capital on the shares in any future holding companies at the amount subscribed on the original investment. This is to prevent a shareholder who does not meet the conditions for a purchase of their own shares from extracting capital by inserting a holding company and later implementing a capital reduction to withdraw funds at CGT rates.

It also proposes removing the capital reduction demerger route of restructuring a company or group, with a corresponding relaxation of the statutory demerger rules to allow the rules to apply to investment businesses and non-UK resident companies.

The distributing company could be dissolved post-distribution, provided that it contains no assets.

A statutory demerger route could be available to help the onward sale or change of control of the demerged business, or a cessation of trade. This would only apply if these events took place at least five years after the demerger transaction.

There could be new conditions for a company’s purchase of its own shares, including that the selling shareholder must have held at least a 5% shareholding for two years before the transaction and have worked for the company throughout that period. This would be extended to five years, where the selling shareholder retains family connections with remaining shareholders and directors, with capital treatment being withdrawn if they return as a shareholder or director within five years.

There would be no retention of a small holding for sentimental reasons.

The company must also take reasonable steps to ensure that the consideration paid for the shareholding does not exceed the market value.

There are also proposals to bring more types of payment on foreign shares within the IT regime, including stock dividends, the transfer of assets or liabilities between the member and the company and certain issues of bonus shares.

It is proposed that there be a closer alignment of the loan to participators and distribution rules to provide greater clarity, including clearly setting out which rules take priority.

Proposals also include a charge under the loan to participators rules for loans from non-UK companies, which would be close companies if they were UK resident. This would likely fall on the UK resident individual.

It is suggested that an amendment or replacement of the TiS rules be made with an updated anti-avoidance regime. The new regime would tackle scenarios where a taxpayer is party to arrangements that enable them to extract value from a company and avoid paying tax.

Responses to the consultation can be emailed to distributionsreform@hmrc.gov.uk. The consultation ends on 14 September 2026.

Should you be unsure of your tax position and would like advice on any capital distributions you are thinking about from your company, please get in touch. We’re here to help.