Consultation on modernising the taxation of distributions and repayments of capital from companies

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 which do not fall within the charge to 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.

The consultation proposes the following:

• Share buybacks and other returns of capital to 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 own shares from extracting capital by way of inserting a holding company and later implementing a capital reduction to withdraw funds at CGT rates.
• Removal of the capital reduction demerger route to restructure 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 to be dissolved post-distribution provided that it contains no assets.
  • A statutory demerger route to be available to facilitate onward sale or change of control of the demerged business, or a cessation of trade, as long as these events do not take place until at least five years after the demerger transaction.
• New conditions for a company purchase of own shares, including:
  • The selling shareholder must have held at least a 5% shareholding for two years prior to 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.
  • No retention of a small holding for sentimental reasons to be allowed.
  • The company must take reasonable steps to ensure that the consideration paid for the shareholding does not exceed market value.
• Bringing more types of payment on foreign shares within the IT regime, including:
  • Stock dividends.
  • Transfers of assets or liabilities between the member and the company.
  • Certain issues of bonus shares.
• Closer alignment of the loan to participators and distribution rules to provide greater clarity.  Several options are suggested here:
  • Clearly setting out which rules take priority.
  • Legislating the current discretionary practice of allowing the unwinding of unintentional distributions.
  • Enabling IT paid on extractions to be set off against liabilities incurred on rectifying the payment.
• 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 need to be a charge on the UK resident individual as the lending company would not be within the charge to Corporation Tax (CT).
  • The charge may be limited to only apply to participators with an interest of 5% or more, or the existing exclusion for loans or advances made in the ordinary course of business may be widened. 
• Amend or replace the TiS rules 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.
  • No detailed proposals have been put forward as the specific design of any reform will be closely informed by discussions with stakeholders.

Responses to the consultation can be emailed to This email address is being protected from spambots. You need JavaScript enabled to view it.. The consultation ends on 14 September 2026. 

Useful guides on this topic

Capital reduction: Tax treatment
The repayment of capital on a company capital reduction can be treated in different ways for a shareholder. This guide reviews the tax treatment of a capital reduction.

Demergers: What are your options?
What are the different types of demergers that are available when you want to reorganise your business? What are the situations where they are typically used? 

Loans to participators (Close Company Loans toolkit)
What is the Corporation Tax treatment when a close company makes a loan to a participator (director-shareholder)? How do the 'bed and breakfasting' rules work? What are the concerns with indirect loans, upstream loans and MBOs?

Purchase (repurchase) of Own Shares
How can a company repurchase its share capital? What are the Companies Act requirements? What are the tax consequences for the company and shareholders?

Transactions in Securities
What are the Transactions in Securities rules? When do they apply? 

External link

Consultation: Modernising the taxation of distributions and repayments of capital from companies 

Question 1: How do any of the proposals outlined in this document impact Corporation Tax payers?

Question 2: What general comments do you have on the proposal to modernise the rules determining the size of a distribution on a reduction of share capital or share buyback?

Question 3: Please describe how this proposal might impact legitimate corporate demergers and share restructuring.

Question 4: Can you anticipate any other unintended or unwelcome consequences of this proposal, such as on third-party sales?

Question 5: In what scenarios would you currently undertake or recommend a non-statutory demerger?

Question 6: Do you think that the statutory demerger rules ought to apply to a broader scope of transactions?

Question 7: What comments and suggestions do you have regarding the amendments suggested above to the statutory demerger legislation?

Question 8: Are there any other specific parts of the legislation which you think the government should re-examine?

Question 9 In what way do you think the demerger rules ought to be liberalised in order to account for the removal of capital demergers?

Question 10: Do you anticipate any unintended consequences as a result of the proposals set out in this chapter?

Question 11: Do you have any general comments on aligning the charge to Income Tax on distributions from non-UK resident companies with the rules that already apply to distributions from UK-resident companies?

Question 12: Can you foresee this proposal having any impact on obtaining relief for double taxation where the distribution is subject to tax in another state?

Question 13: Do you anticipate this proposal deterring any commercial corporate actions? If so, please provide details and suggestions on how this impact could be addressed.

Question 14: Do you have any comments on the proposal to extend the charge to stock dividends? In particular, are there difficulties with the classification of shares in non-UK jurisdictions?

Question 15: Do you have any comments on extending the charge to redeemable bonus shares and securities?

Question 16: Do you have any comments on to what extent the charge to Income Tax on distributions should apply to payments on special securities and non-commercial securities?

Question 17: Do you have examples of where instruments that would be treated as special securities and non-commercial securities are used in existing structures where the return would be paid to UK residents within the charge to Income Tax?

Question 18: Do you have any comments on the potential tensions between the definitions used in the UK distributions rules and non-UK corporate legislation, especially with regard to the distinction between income and capital? In particular, are there any difficulties around what constitutes a ‘repayment of capital’? How could these be addressed?

Question 19: Do you have any insights from other jurisdictions which also use the capital/income divide in their tax legislation?

Question 20: Are you aware of any particular existing difficulties around whether a distribution from a non-UK incorporated company is a ‘dividend’? Should the government consider introducing provisions to clarify the treatment where the non-UK company law is unclear?

Question 21: When calculating what amount of a distribution is a repayment of capital, would it be effective to permit small shareholders in widely held or quoted companies, who do not have access to the necessary information, to simply use the nominal value of the interest they hold on a share buyback? Are there any difficulties with calculating the nominal value of the share in some jurisdictions?

Question 22: Are you aware of instances where dividends or other distributions have been improperly paid? If so, were the distributions repaid to the company and on what timescale? What was the tax treatment generally adopted on the repayment?

Question 23: Would priority rules to establish what the primary charge will be on an extraction address the issue? Are there any adverse consequences to this?

Question 24: Do you have any views as to whether legislating for the current discretionary practice of unwinding unintentional gratuitous transfers would provide a solution?

Question 25: What are your views on allowing Income Tax paid on an unlawful distribution to be set off against liabilities incurred on rectifying the issue?

Question 26: What alternative solutions might be implemented to address the issues raised in this chapter?

Question 27: Given that the tax would need to be paid by individuals rather than by the companies making the loans, would this result in particular administrative difficulties? If so, please provide examples.

Question 28: What general comments do you have on the proposal to introduce a temporary tax on loans received from non-UK resident closely controlled companies?

Question 29. Do you have any specific comments on the four options outlined above? Do you have any suggestions as to what time periods would be appropriate?

Question 30: The close company definition is extremely broad. Can you see this proposal affecting loans made on arm’s length terms to participators with very minor interests, and if so, can you provide examples?

Question 31: What impacts would the proposal have on arm’s length commercial lending?

Question 32: Would limiting this charge to participators and associates of participators with material interests in the overseas companies help to target this at loans which represent extractions of profit?

Question 33: If we expand the exclusion for loans or advances made in the ordinary course of business, what changes would be necessary to avoid curtailing normal commercial activity?

Question 34: What general comments do you have on the proposals set out in this chapter?

Question 35: What unintended consequences do you anticipate as a result of these changes?

Question 36: What general comments do you have on the proposal set out in this chapter?

Question 37: What unintended consequences do you anticipate as a result of this proposal?