Modernising the distributions framework: next steps

The measure

The government has confirmed it will proceed with reform of the rules governing the taxation for non-corporate investors of distributions and repayments of capital from companies, publishing its response to the consultation launched earlier this year and setting out a timetable for implementation. 

The government intends to proceed with all seven proposals as a single, cohesive package, reflecting their interlinked nature. Changes have been made compared to the consultation document published in the summer, and the government continues to consider the detail of the rules. In summary, the key areas where changes are to be made are: 

• Capital reductions: the amount which is subject to capital gains tax where a capital repayment is received following a reorganisation is to be reduced, with income tax applying to the difference between the original amount subscribed and the repayment received.  
• Demergers: statutory relief will be significantly broadened, including allowing some demergers ahead of third-party sales to qualify.
• Distributions from non-UK resident companies: the government wishes the taxation of distributions from non-UK resident companies to more closely align with the taxation of distributions from UK resident companies. The government have announced that stock dividends will be brought into income tax. Changes may be made to the taxation of bonus issues of shares, and further points are also under consideration. Further changes are to be made, subject to consultation. The government have said that they wish to protect the competitiveness of the fund sector, and so capital treatment will continue to apply to  genuine fund investment returns and asset-manager co-investment returns where capital treatment is currently available.
• Loans from non-UK resident companies: a new temporary charge will apply to certain loans from non-UK companies, potentially targeted through material-interest and commercial-purpose exclusions.
• Share buybacks and Transactions in Securities (TiS): both regimes will be changed, with the government referring to the changes as “modernisation”. The government are considering protections to provide flexibility to protect genuine succession, employee share schemes and commercial transactions. 

A technical consultation, including draft legislation, will take place during 2027, giving stakeholders a further opportunity to comment on the detail of the reforms, including how they interact with existing legislation and with other related changes, such as the ongoing consultation on the taxation of UK resident members of US LLCs and other reverse hybrids. 

Who will be affected?

Companies making distributions, repayments of capital, reductions of capital, demergers or purchases of own shares, and individual and trust shareholders receiving value from a company in any of these ways. Businesses and investors involved in private capital structures, cross-border group reorganisations and transactions potentially within the scope of the TiS rules should expect to be directly affected by the eventual reforms. 

When will the measure come into effect?

A technical consultation, including draft legislation, will take place in 2027. The government intends for the changes to apply prospectively from April 2028, following completion of the technical consultation.