Proposed changes to company distributions: What the 2026 consultation means for business owners

The government’s recently published consultation, ‘Modernising the Taxation of Distributions and Repayments of Capital from Companies’, represents one of the most significant reviews of the UK distributions framework since Corporation Tax was introduced in 1965.  

Why is the government reviewing the taxation of distributions?

The central theme running through the consultation is consistency, highlighting concerns that shareholders can sometimes achieve different tax outcomes from transactions that are economically similar. For example, extracting value from a continuing business but being taxed as a capital receipt rather than as income.  

The gap between Capital Gains Tax (CGT) and Income Tax treatment has long influenced behavioural decisions. Although rates have moved closer together over time, and there have been calls to equalise the two taxes, the availability of reliefs such as Business Asset Disposal Relief, capital losses and the different computational mechanics of CGT can still make capital treatment attractive. HMRC’s concern is that some restructuring arrangements can create capital outcomes that were arguably never intended by the legislation.  

Proposed changes to capital reductions 

One of the more significant proposals relates to freezing the amount of ‘capital on the shares’ following transactions such as share-for-share exchanges. The consultation provides an example where a shareholder inserts a new holding company above a trading company, subsequently undertakes a capital reduction and extracts significant value that receives partial CGT treatment rather than being taxed entirely as a dividend. 

To counter this, the consultation proposes that future holding companies inherit a ‘frozen’ amount of capital on the shares broadly based on the original subscription made by the shareholder. As a result, future returns of capital would be aligned more closely with the deferred CGT base cost position, substantially reducing the scope for capital treatment in many circumstances.  

For those advising on such transactions, the Transactions in Securities (TIS) rules would ordinarily be considered and could already potentially counteract similar arrangements. However, the government’s view is that these rules are an outdated approach to anti-avoidance legislation and can be difficult to apply, relying on the requirement to establish a tax advantage purpose or on HMRC counteraction activity (an adjustment under TIS can only be implemented through a counteraction notice – it cannot be self-assessed). As a result, the government intends to amend or replace the TIS rules with an updated anti-avoidance regime, which is expected to be ‘clearer and more principles based’. 

The practical implications could be wide ranging. Holding company structures are not established solely for tax reasons. They are frequently used to facilitate acquisitions, succession planning, reorganisations, external investment and business separations. The challenge for HMRC will be designing rules that target perceived avoidance without creating unintended consequences for ordinary commercial activity.  

What the reforms could mean for demergers

Ever since the introduction of the Companies Act 2006 solvency statement procedure removed the need for court approval for many reductions of capital, carrying out demergers (broadly splitting groups of companies) using a ‘non-statutory’ capital reduction process has become increasingly popular. The consultation acknowledges that the proposed capital reduction reforms discussed above could significantly affect non-statutory demergers.  

The consultation notes that many businesses currently achieve commercial separations through capital reduction demergers or liquidation demergers that rely on existing restructuring provisions. If the ‘frozen capital’ approach is adopted, these routes may become significantly less attractive or potentially unavailable. Furthermore, the alternative statutory approach is not widely utilised, given its narrower scope and requirement for the companies involved to be trading. 

Recognising this, a simultaneous review of the statutory demerger regime has been announced. Many tax advisers would welcome a holistic, wider-ranging statutory approach to demergers. Demergers are often undertaken for sound commercial reasons, including succession planning, the separation of differing business activities, risk management and shareholder disputes. If HMRC intends to restrict non-statutory routes, there will be strong pressure to ensure that the statutory alternatives are practical, flexible and fit for modern business structures. 

However, the proposed restrictions contained within the consultation that will apply to onward sales, cessations of trade or changes in control within 5 years of the demerger represent a significant departure from the current position available through the non-statutory procedure. It should also be noted many taxes are considered as part of a demerger process, including Stamp taxes on property and shares. The consultation is silent in this regard. 

Other changes under consultation

The government is also considering aligning the tax treatment of distributions and loans from non-UK resident companies with the treatment from UK companies.  

Alongside these changes, the consultation proposes reforms to the Purchase of Own Shares rules, limiting the beneficial CGT treatment to a narrower set of circumstances. However, the most subjective rule, determining a trade benefit purpose, is set to be replaced with a more ‘mechanical’ approach. 

What businesses should do now

At this stage, it is important to remember that this remains a consultation rather than a confirmed policy direction. The government is actively seeking feedback and has specifically stated that it wishes to understand the impact on legitimate commercial activity, growth and investment before progressing reforms.  

The consultation runs until 14 September 2026.

If you have any questions or would like to discuss further, please get in touch.