UK Government consults on modernising the taxation of distributions and repayments of capital from companies

Why should I read this?

As part of the UK Government’s Tax Update 2026, HMRC published a consultation on proposals to update the distributions framework. The proposals have the potential to significantly alter the tax treatment of extractions of value from companies by individual shareholders, narrowing the circumstances in which capital treatment is available.

The consultation seeks views on proposals to update seven areas of the distributions rules, where the government consider legislation has not kept pace with commercial practice. The proposals cover:

• reviewing the treatment of extractions of value in return for ‘new consideration’ and repayments of capital;

• aligning the tax treatment of distributions from non-UK resident companies with that of distributions from UK resident companies;

• reviewing the interaction between the distributions regime and the loans to participators regime, and considering how the loans to participators regime might be extended to cover loans received from non-UK resident companies; and

• reforming the demergers provisions, the purchase of own shares relief, and the transactions in securities rules.

The proposals focus on shareholders that are individuals or trusts, and are not intended to affect corporate shareholders directly.

The consultation will run for 12 weeks and end on 14 September 2026.

After the consultation, the government will analyse the consultation responses and publish a summary of responses. HMRC have indicated they may seek to engage in further consultation on specific reforms.

What are the consultation proposals?

The following is a high level summary of the consultation’s proposals.

• Reduction of capital – HMRC intend to reduce the scope for companies to extract value from continuing businesses at capital rates. Currently it is possible to increase share capital by inserting a new holding company. The consultation proposes that share buybacks and other returns of capital should reflect a ‘frozen’ amount of capital on the shares in any new holding companies, based on the amount subscribed on the original investment. Any amount returned to shareholders in excess of this would be treated as a distribution.

• Demergers – HMRC propose removing the capital reduction route used by companies to carry out non-statutory demergers, forcing companies to rely on the statutory route (set out in Chapter 5, Part 23, CTA 2010). HMRC recognise that statutory demerger relief is not currently well used and therefore wish to re-examine the rules to ensure their effectiveness. The conditions are intended to be relaxed and areas of legislative ambiguity clarified (although in light of this HMRC also propose to remove the right to apply for automatic appeal to the Tribunal should a clearance request be denied).

• Income tax treatment of distributions from non-UK resident companies – Currently, the charge to income tax on distributions from non-UK resident companies is much narrower than the income tax charge on distributions from UK resident companies, with only dividends that are not of a capital nature brought into account. This can incentivise the use of non-UK resident companies and extractions in forms other than dividends. The government is considering aligning the tax treatment of distributions from UK resident and non-UK resident companies, extending the income tax charge to more classes of distributions from non-UK resident companies.

• Interaction between debt, loans and the distributions legislation – Where a close company (broadly, a company controlled by five or fewer participators or by directors who are participators) makes a potentially unlawful dividend, this may ultimately be determined to be a distribution chargeable to income tax on the participator, or an unlawful payment which is not chargeable to income tax, resulting in a charge on the company under section 455 CTA 2010. The government intends to provide greater clarity in this area by more closely aligning the distributions code and the loans to participators rules, such that extractions of value in favour of shareholders are clearly charged under one set of rules. This includes proposals to introduce rules establishing the priority of the relevant charges. 

• Loans and other temporary extractions from non-UK resident companies – As part of the wider proposal to reform the tax treatment of distributions from non-UK resident companies (described above), the government is considering whether to introduce a regime to tax loans or advances made by non-UK resident companies to their participators and associates of participators. This would apply to loans or advances from companies that would be close if they were UK resident.

• Purchase of own shares rules – The provisions in section 1033 CTA 2010 enable a close company to undertake a purchase of its own shares without making a taxable distribution. The government intends to replace the trade benefit test in section 1033, which is a significant source of dispute between taxpayers and HMRC, with a more mechanical set of requirements, in order to improve clarity.

• Updated capital extraction anti-avoidance – The government intends to amend or replace the transactions in securities rules with an updated anti-avoidance regime, to better reflect contemporary business structures and to provide a more flexible and modern framework in which to tackle avoidance. The government intends the new rules to be clearer and more principles-based, tackling scenarios where a taxpayer is party to arrangements that enable them to extract value from a company and avoid paying tax.

The consultation invites respondents to identify how any of the proposals outlined may impact corporation tax payers, which are not intended to be directly affected by the proposals.

What else do I need to know about the consultation?

HMRC state that the proposals are being consulted on because of their complexity and the need for the government to have a clear view of the impacts of any change before proceeding. HMRC have indicated that, following the consultation, they will only move forward with the proposals to the extent that doing so is in line with the government’s objectives, which means ensuring that commercial activity is not adversely affected and wider impacts on growth and investment are fully considered.

The proposals are therefore at an early stage, and any resulting changes are unlikely to be implemented for some time. However, the proposals represent a substantial overhaul of the tax rules in relation to interactions between companies and their shareholders, including those relating to the nature, timing, and quantum of distributions, which have remained largely unchanged since the introduction of corporation tax in 1965.

The general theme of the proposals is towards restricting structures that have historically enabled individual shareholders to extract value at CGT rates rather than income tax rates. This is likely to affect a range of common transactions, including capital reduction demergers, owner-manager exits and distributions from offshore holding structures.

The demerger proposals merit particular attention. Capital reduction demergers are a widely used restructuring tool, particularly where the conditions for a statutory demerger cannot be met, but if the capital reduction route is removed or restricted, businesses will need to rely more heavily on statutory demerger relief. Although the consultation proposes liberalising these rules, it suggests a general prohibition on a demerger being used to facilitate an onward sale within five years, which would limit the usefulness of the relief for transactions linked to an impending sale.

For close companies, the proposed changes to purchase of own shares relief could have a material impact on shareholder exits. The current trade benefit test, while subjective, has provided flexibility, whereas the move towards more mechanical conditions could be more restrictive.

Given the significance of the proposals, companies, individual shareholders and their advisers should review the proposals carefully, consider responding to the consultation, and closely monitor developments in this area.

The Eversheds Sutherland tax team are preparing a response to the consultation, which clients are welcome to feed into. If you are a client of the Eversheds Sutherland tax team, please provide any comments to your usual contact by 31 August 2026.

For more information on the consultation

If you would like to discuss anything in this briefing, please do not hesitate to get in touch with any of the Eversheds Sutherland contacts listed below.