Never a dull day in Tax! HMRC’s consultation on modernising the taxation of distributions and repayments of capital from companies, which appeared on 23 June 2026, was quite a surprise and could fundamentally change how share buybacks, demergers and returns of capital are structured. It was published (alongside other, not nearly so interesting, content) as part of the Tax update 2026.

The consultation proposes wide-ranging reform of the tax rules for shareholders within the charge to income tax (individuals and trusts). Although the proposals are not intended to affect corporate shareholders directly, they will have to be taken into account by companies when structuring transactions with shareholders who are individuals or trusts and so HMRC is keen to understand the impact on corporation tax payers.

In this post I offer an overview of the proposals. Subsequent posts will look at particular proposals, and their effect on transactions in more detail.

What is wrong with the current rules?

HMRC is concerned that the tax rules on distributions have remained largely unchanged since the introduction of corporation tax in 1965. The consultation notes that “the rules generally operate well” but that the commercial and legal environment in which they operate has undergone significant change. In particular, HMRC wants to address the distortions which arise in some scenarios where substantively similar payments receive different tax treatment. Capital treatment is more beneficial for individuals and trusts than income tax treatment because the rate of tax is lower and the amount brought into tax is lower. A common theme of the proposals is the desire to ensure “economically similar” payments to a shareholder are taxed consistently (for which read, “are taxed as income”).

HMRC recognises that the rules are complex and that stakeholder input is essential to ensure the proposals are effective and practical. HMRC is keen not to undermine commercial practice and “legitimate commercial restructurings” but, as the further blog posts will explain, the proposals completely move the goalposts and will inevitably lead to behavioural change.

What transactions between companies and their individual shareholders will be affected?

• Reductions of capital – If the proposals are enacted, it will no longer be possible to insert a Holdco above a company making a distribution in order to increase “good capital” and reduce the tax on a reduction of capital. Instead of getting a market value uplift in the base cost of the Holdco shares exchanged for the original shares, it is proposed that share buybacks and other returns of capital reflect a “frozen” amount of capital on the shares in any future holding company at the amount subscribed on the original investment, matching the CGT deferral of the original base cost. This is intended to give the same outcome as if the original company shares had been sold back without the insertion of the Holdco. But HMRC does not intend shareholders restructuring for legitimate business purposes to be affected by the proposals.
• Demergers – Currently, the capital reduction route can be used by companies to carry out non-statutory demergers. The removal of this route will increase reliance on the statutory demerger route, so HMRC wants to ensure the effectiveness of the statutory demerger rules, amending the conditions to provide clarity, minimise disputes and allow businesses to operate more freely. The quid pro quo of the relaxation of conditions and the clarification of ambiguity, however, is the removal of the right to apply for automatic appeal by Tribunal should a statutory demerger clearance be denied.

• Distributions from non-UK resident companies – Under current law, different rules apply depending on whether a distribution is from a UK resident company or a non-UK resident company. There is a broad statutory definition of distributions used for distributions from a UK company, underpinned by detailed rules to ensure that extractions of value from continuing companies are charged to income tax. The charge to income tax on distributions from non-UK companies, however, is much narrower as it is limited to “dividends which are not of a capital nature”. Determining whether dividends are “of a capital nature” has led to uncertainty for taxpayers and disputes with HMRC. 

  The government is exploring aligning the tax treatment of distributions from non-UK resident companies with that of UK resident companies. Even with alignment, the rules will require a distinction between a “dividend” and “any other distribution” which is currently determined by the characteristics of the non-UK resident entity by reference to UK law, which can lead to uncertainty and disputes. So the government is also exploring providing clarity with a provision that deems a payment to be a dividend or other distribution if certain factors are present.

• Transactions with close companies – A number of proposals are made to bring the distributions code and loans to participators rules into alignment to ensure extractions of value in favour of shareholders are charged clearly under one set of rules.
• Transactions with non-resident companies that would otherwise be close – The government is considering whether to introduce a regime for the taxation of loans/advances to individuals from companies that would be close if they were UK resident.
• Purchase of own shares from departing shareholder of a close company – A relief currently applies to ensure a purchase of own shares from a departing shareholder is taxed as capital if the subjective “trade benefit test” is satisfied. It is proposed to replace the trade benefit test, which has been a significant source of dispute, with a more mechanical set of requirements.

Proposed anti-avoidance regime to amend or replace the transactions in securities (TIS) legislation

The consultation states that the TIS rules reflect an “outdated approach to anti-avoidance legislation and can be difficult to apply”. A more modern and flexible framework to tackle avoidance is required and so new rules are proposed that will be clearer and more principles based than the current TIS rules. The anti-avoidance rule would be a “back stop” with other legislation taking priority where applicable to counter a transaction.

Next steps

The consultation runs until 14 September 2026. We do not know yet which Finance Bill these proposals will be included in, but it is hoped, given the complexity of the current rules and the wide-ranging nature of the proposed changes, that they will not be rushed through and that due consideration is given to the responses to the consultation and to making the legislation workable.

Look out for our further posts on this consultation which will dig into the detail of these proposals and their implications.