HMRC publish consultation on modernising the distributions framework for companies

HMRC published an open consultation on 23 June 2026 titled Modernising the taxation of distributions and repayments of capital from companies. The consultation runs for 12 weeks, closing on 14 September 2026.

The stated objective is to ensure the rules operate as intended; in practice this means changing the areas where the existing tax treatment has evolved in a way HMRC consider inconsistent with the intended policy outcome, without undermining commercial practice.

The consultation covers seven areas: reductions of capital; demerger relief; the income tax treatment of distributions from non-UK resident companies; the interaction of the distributions and loans-to-participators regimes; loans from non-UK companies; the 'Purchase of Own Shares' rules; and the 'Transactions in Securities' rules.

The consultation is focused on situations where the shareholder is within the charge to income tax; the proposals are not intended to affect corporate shareholders directly. HMRC invite respondents to flag any unintended consequences for taxpayers within the scope of corporation tax.

Whilst the formal consultation runs for 12 weeks, HMRC have indicated that they expect to engage with stakeholders beyond that period, although no formal timetable has been agreed.
 

Key take aways

In very broad terms, the proposals include:

Reductions of capital: under existing rules it can be possible to extract value from a company in a capital form for UK tax purposes by inserting a new holding company and then reducing the capital of that holding company. It is proposed that share buybacks and other returns of capital reflect a ‘frozen’ amount of capital on the shares in any future holding companies following a share-for-share exchange at the amount subscribed on the original investment in the company transferred to the holding company. HMRC are actively seeking to understand scenarios in which this would produce an unfair result, and how unintended adverse effects might be mitigated.

Demerger relief: the reductions of capital proposals described above would remove the capital reduction route for demergers and therefore the government proposes to extend the statutory demerger provisions (which are not currently often available and therefore not well used) to ensure that these do not act as a barrier to business evolution. A number of changes to the conditions are proposed that would broaden the scope of companies able to meet the requirements but would also introduce restrictions where a business is sold within a specified period (potentially 5 years) following a demerger, which could limit application.

Distributions from non-UK resident companies: the government proposes to extend the income tax charge to a wider category of distributions from non-UK resident companies than is currently the case in order to align the tax treatment of substantially similar payments to a UK resident shareholder from UK and non-UK resident companies. HMRC's position is that the current divergence evolved from the income/capital distinction without justification, and that substantially similar payments should be treated the same. HMRC are seeking input on unforeseen interactions with non-UK company law and on whether instances of double taxation could arise.

Interaction between debt, loans and the distributions legislation: currently, an amount may be subject to tax as a distribution even where the payment may not be properly made under company law and may be subsequently repaid to the company. This is a complex area, and the consultation document sets out various options, including a priority rule to provide greater certainty on the tax treatment and ensure that tax is due at the time the value is extracted from the company. Alternative options include legislating the current discretionary practice of allowing the unwinding of unintentional distributions and enabling income tax paid on extractions to be set off against liabilities incurred on rectifying the payment.

Loans from non-UK resident companies: the government proposes to introduce a new tax charge on loans made by non-UK resident close companies to their participators. The existing regime for UK resident companies recognises that loans to shareholders can represent the extraction of profits from the company that would otherwise not be charged to tax and charges close companies at the dividend upper rate on loans made to and debts incurred by participators. There is currently no equivalent wide-ranging charge on loans or advances made by closely controlled non-UK resident companies, meaning that shareholders may take funds from these companies for personal use on a long-standing and often permanent basis without incurring a tax charge. The proposed new tax charge and the relief due upon repayment would fall on the UK resident individual, reported through their Income Tax Self Assessment tax return. HMRC acknowledge that this represents the most significant change in terms of reporting obligations and they are seeking views on how to manage this without creating undue burden.

'Purchase of Own Shares' rules: the government proposes to amend the conditions for capital treatment when a company buys back its own shares to replace the current subjective “trade benefit test” with a more mechanical set of requirements. The relief is intended to facilitate a departure of a shareholder from a company for the benefit of the company’s trade and the proposed new conditions include: a full surrender of the shareholding and any directorships on departure; reduced flexibility for phased or partial exits (potentially limited to cases where the shareholder fully exits within 2 years); stronger conditions around the shareholder’s level of involvement in the business prior to exit (including minimum 5% equity holding); tighter rules where individuals remain connected to the business (e.g. through family links or influence); and potential clawback of relief if the individual returns.

'Transactions in Securities' (TIS) rules: the government proposes to amend or replace the TIS rules with an updated anti-avoidance regime. The rules are intended to be more principles based. HMRC continue to see TIS as a backstop rather than a primary charge, and the eventual design depends on the outcome of the consultation in respect of the other areas covered. HMRC are actively seeking views on current rules and elements that should be retained. Any new regime will need to be carefully calibrated to ensure that commercial activity is not adversely affected, such as corporate restructurings where no value leaves the corporate sphere.
 

Next steps

HMRC's stated objective is to clarify the income/capital boundary and to arrive at answers that make sense for growth, investment, and normal commercial practice. Given the breadth and depth of the proposals, fund managers and portfolio company boards may wish to consider the following:

• Assessing whether extraction strategies in portfolio companies and fund vehicles could be affected by the proposed changes to the distribution rules, in particular in respect of returns received by participants in management equity plans or carried interest and co-investment plans (although this will be less relevant where the new carry rules apply to treat all carried interest returns as trading income).
• Reviewing any proposed pre-exit restructurings involving share-for-share exchanges followed by subsequent capital reductions or share buybacks where the "freeze" on capital may impact the expected outcome.
• For businesses contemplating separations of portfolio companies through demergers, considering whether the proposed liberalised statutory conditions set out in the consultation document could apply and identifying where any gaps remain.
• Where non-UK holding structures are used, considering how the proposed extension of the Income Tax charge to distributions and returns of capital from non-UK resident companies to individuals could apply to current return flows, especially if there is a possibility of double taxation.
• Identifying any arrangements where loans are made to UK individuals, for example, to purchase equity in portfolio companies.
• Management buyouts, succession planning transactions, and portfolio company exit structures involving purchase of own shares relief may require careful review against the proposed mechanical tests.

The consultation is open until 14 September 2026 and responses should be sent by email to distributionsreform@hmrc.gov.uk.

Please speak to your usual Deloitte contact, or any of the people below, if you have any questions or comments.