On 23 June 2026 HMRC launched a consultation signalling a potentially significant modernisation of the tax treatment of distributions and capital repayments to individual and trust shareholders. The consultation forms part of the Government's wider Tax Update 2026 package and represents the first major review of many aspects of the distributions regime since the introduction of corporation tax in 1965.
The proposals seek to address what HMRC describes as longstanding inconsistencies in the current regime, under which economically similar extractions of value can be taxed differently as income or capital. HMRC's objective is to align the tax treatment of those outcomes more closely, creating a more coherent framework and reducing opportunities for tax-driven structuring.
In practice, the proposals could have significant implications for capital reductions, demergers, and the use of share buybacks as an exit route for departing shareholders.
The key proposals in consideration
Harmonising the tax treatment of UK and non-UK distributions
The proposals would bring a wider range of distributions from non-UK resident companies within the scope of the UK income tax regime.
Under the existing framework, many distributions from non-UK resident companies fall entirely outside the UK distributions regime and may instead give rise to capital gains treatment. The consultation proposes to harmonise the treatment of UK and non-UK distributions, extending the income tax charge to a wider category of overseas distributions.
Returns of capital and holding company insertions
HMRC is concerned that the insertion of a new holding company by way of a share-for-share exchange can, under current rules, be used to increase the amount that may subsequently be returned to shareholders with capital gains tax treatment on a reduction of capital.
To address this, HMRC is considering "freezing" the amount eligible for capital treatment by reference to the shareholder's original investment. As a result, a share-for-share exchange would no longer increase the amount qualifying for capital treatment, and any excess returned to shareholders would generally be taxed as income.
If adopted, the proposals could also have significant implications for capital reduction demergers, which are widely used to separate businesses in a tax-efficient manner. As these transactions typically rely on the same holding company insertion and share-for-share exchange mechanism, the proposed changes could substantially limit the availability of the capital reduction demerger route. HMRC recognises that this is likely to increase reliance on the statutory demerger regime.
Review of statutory demerger regime
Given the anticipated increased reliance on the statutory demerger regime, HMRC is reviewing whether the existing conditions remain fit for purpose and continue to support genuine demerger transactions. The consultation seeks views on whether the regime can be made clearer and better targeted, so that it supports genuine commercial demergers without facilitating value extraction.
Extension of loans to participators regime to non-UK resident close companies
Under the current rules, UK close companies can face a tax charge on loans made to shareholders and certain connected persons, although the charge is repaid if the loan is later cleared. The consultation proposes extending similar rules to non-UK resident companies that would be treated as close companies if they were UK resident. As a non-UK company cannot be charged directly, HMRC is considering imposing the charge on the relevant UK-resident shareholder (or an associate). The aim is to prevent shareholder loans being treated more favourably simply because they are made by an overseas close company rather than a UK close company.
Interaction between distributions regime and loans to participators
HMRC has also identified uncertainty where an extraction of value could potentially fall within both the distributions regime and the loans to participators rules. This can arise, for example, where a distribution is subsequently found to be unlawful and must be repaid. The consultation therefore explores whether clearer rules are needed to determine which regime should take priority in these circumstances.
Conditions to obtain capital treatment when a company buys back its own shares
The consultation also considers changes to the circumstances in which the proceeds of a share buyback are taxed as capital rather than income. In certain circumstances, shareholders can currently obtain capital gains tax treatment on a share buyback rather than being taxed as receiving an income distribution.
HMRC considers that the current requirement for the transaction to be undertaken for the "benefit of the company's trade" can be subjective and difficult to apply in practice. The consultation is therefore exploring whether this test should be replaced with clearer, more objective conditions that focus on genuine shareholder exits.
- Reform of the Transactions in Securities regime
The Transactions in Securities ("TIS") rules are intended to prevent arrangements that convert what would otherwise be taxable income distributions into more favourably taxed capital receipts.
The consultation also considers reforming the TIS regime, with HMRC seeking views on how the rules can be modernised to provide greater clarity while continuing to counter such arrangements.
What does this mean for businesses?
Although the consultation is at an early stage, the proposals could have far-reaching consequences for owner-managed businesses, succession planning and corporate reorganisations. In particular, businesses and advisers involved in demergers, share buybacks, capital reductions and shareholder exit planning may wish to consider the potential impact carefully. Some commonly used structuring techniques could become less attractive if the proposals are implemented.
HMRC has emphasised that it does not intend to undermine legitimate commercial activity and is seeking feedback on whether any of the proposed reforms could create unintended consequences for genuine business transactions.
Next steps
The consultation is open until 14 September 2026. HMRC will review responses before deciding whether to proceed with any legislative changes. While it remains to be seen how many of the proposals will ultimately be adopted, the consultation signals a clear intention by HMRC to revisit the long-standing distinction between income and capital treatment in the context of company distributions and shareholder returns.
