On 23 June 2026, HMRC launched a significant consultation entitled “Modernising the taxation of distributions and repayments of capital from companies”. The consultation represents one of the most substantial reviews of the UK distributions framework for decades and could have far-reaching implications for owner-managed businesses, family companies, investors and shareholders. The consultation closed on 14 September 2026 and, if implemented, many commonly used restructuring techniques may need to be reconsidered. Given the proximity to the budget in October, any changes may be implemented in that announcement, with immediate or future effect.
Why is HMRC reviewing the rules?
The current legislation governing company distributions has its roots in the 1960s. HMRC’s view is that commercial practice has evolved considerably since then, creating situations where economically similar transactions can produce very different tax outcomes. The government’s stated objective is to simplify the rules, improve consistency, reduce opportunities for tax-motivated structuring and modernise areas where legislation has not kept pace with commercial reality.
Importantly, the consultation is primarily focused on individual shareholders and trusts rather than corporate shareholders. Nevertheless, the proposals have the potential to affect a wide range of corporate transactions, including shareholder exits, succession planning, family reorganisations, business separations, demergers and share buy-backs.
Proposed changes to capital repayments
One of the most significant proposals concerns the taxation of capital returns.
Under current rules, it is often possible to undertake a share-for-share exchange or insert a new holding company into a structure, creating additional share capital that may later be repaid with Capital Gains Tax treatment rather than dividend treatment. HMRC has expressed concern that these arrangements can allow shareholders to extract value at capital gains tax rates in circumstances where the underlying economic position has not changed.
To address this, HMRC is proposing a “frozen capital” approach. Broadly, the amount treated as share capital for future capital repayments would be limited to the amount originally subscribed by shareholders. Amounts returned in excess of that figure would potentially be treated as income distributions rather than capital receipts.
If enacted, this could significantly reduce the circumstances in which shareholders can obtain capital treatment on corporate value extractions.
Demergers
Perhaps the most commercially important aspect of the consultation relates to demergers.
Many businesses use demergers for entirely commercial reasons, including:
- Separating different trading activities.
- Succession planning between family members.
- Resolving shareholder disputes.
- Preparing part of a group for sale.
- Ring-fencing risks between different operations.
Historically, capital reduction demergers have become the preferred route for many transactions because they are relatively flexible and can often achieve tax-efficient outcomes where statutory demerger relief is unavailable – it is often the case that a Company cannot meet the strict conditions for statutory relief. However, HMRC’s proposed changes to capital repayments would effectively remove much of the attractiveness of the capital reduction demerger route.
Recognising this consequence, the consultation also proposes reforms to the statutory demerger regime. HMRC acknowledges that existing statutory demerger provisions are often too restrictive and are therefore underutilised. The consultation considers broadening access to statutory reliefs while introducing safeguards to prevent abuse.
Share buy backs
The consultation also reviews the Company Purchase of Own Shares (CPOS) rules.
Currently, where specific conditions are satisfied, shareholders can obtain Capital Gains Tax treatment when a company purchases its own shares. However, those conditions are already quite restrictive. The key gateway to relief is the requirement that the transaction benefits the company’s trade. The application of this test can sometimes be uncertain and contentious, and the proposal is to limit relief availability to working individuals who hold a material (5%) shareholding. In addition, while the current rules require a departing shareholder to break connection with the Company to qualify for relief, the proposals include a new clawback mechanism of relief if they later return to be a Director or Shareholder within 5 years.
HMRC is seeking views on potential reforms to these provisions, with the aim of creating a more consistent framework for determining when capital treatment should be available and when income treatment should apply. Any changes in this area could have a material impact on shareholder exits, management succession arrangements and family business planning.
What businesses should do now
At present these changes remain proposals rather than enacted legislation. However, the breadth of the consultation demonstrates HMRC’s intention to revisit some long-established planning techniques.
Businesses currently considering:
- Demergers;
- Group reorganisations;
- Family succession planning;
- Share buy-backs;
- Capital reductions; or
- Shareholder extraction strategies
should review (and potentially accelerate) proposed transactions carefully in light of the consultation. Transactions that are commercially desirable today may become materially more complex if the proposed reforms proceed in their current form.
Looking ahead
The consultation was open until 14 September 2026, after which HMRC will analyse responses and consider whether further consultation or legislative proposals are required. While the final form of any reforms remains uncertain, it is clear that HMRC is seeking a fundamental shift in how shareholder value extractions are taxed.
For many owner-managed businesses, the most significant issue is likely to be the future of capital reduction demergers and whether proposed reforms to the statutory demerger rules provide a practical alternative, together with the potential changes to share buybacks. Given the potentially wide-ranging implications, businesses contemplating restructurings over the next few years should seek professional advice at an early stage to ensure that future planning remains both commercially effective and tax efficient.
To discuss anything raised in the article in more detail, please contact: Tom Golding, Tax Partner.
