Consultation on the UK taxation of distributions

The government has published a consultation document on the tax treatment of individuals in receipt of distributions as part of its Tax Update 2026. The consultation notes that the provisions dealing with the taxation of corporate distributions have largely been in place since 1965. These rules are extremely broad and are intended to capture any extractions of value from a company to a shareholder in respect of their shareholding, or in respect of debt instruments with equity-like characteristics. Whilst the government considers that they generally work well, equally the commercial and legal environment in which they apply has undergone significant change in the meantime. As a result, the government is carrying out a wide-ranging review of the rules, with a particular focus (though not limited to) a number of specific scenarios.

The government is therefore considering how the rules could be modernised to ensure they operate as intended and do not give rise to distortions, without undermining commercial practice. The intention is to produce a cohesive system that taxes equivalent payments in more consistent way. The consultation is divided into seven sections covering a number of specific issues.

Chapter 2 (Reduction of capital) explores how tax planning around ‘capital on the shares’ within the distributions regime can be used to create outcomes not envisaged by legislation and seeks views on potential options to reform the rules. In particular, the government proposes to reduce the scope for companies to use the existing rules to extract value from continuing businesses as capital returns. In particular, 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 at the amount subscribed on the original investment, thereby matching the CGT deferment of the original base cost.

The government recognises that the proposal might potentially lead to unfair outcomes in some circumstances. For example, since the proposal is to limit the value of the share capital in both original and holding companies, then a return of capital would be limited to the value of the initial share subscription in relation to both companies. Should the holding company sell shares in the original company, by default the capital on the shares would remain frozen in the hands of any purchaser, which may lead to unfairness in the event of a subsequent share buyback if the new shareholder is liable to UK tax on that receipt. The government also recognises that this proposal may cause issues where share for share exchanges take place within corporate groups or the substantial shareholder exemption (SSE) applies. The government welcomes thoughts on the issues that this may cause, and suggested mitigations.

The consultation stresses the importance of shareholders attempting share restructuring for legitimate business purposes not being affected by the proposal and welcomes input into countering any other newly created unfair outcomes.

Chapter 3 (Demergers) looks at the existing demerger relief rules and explores whether these could be better targeted. In particular, the statutory demerger provisions in CTA 2010 Chapter 5 Part 23 aim to remove any tax disincentive to demerge by exempting such distributions with parallel reliefs under TCGA 1992 to prevent a gain being realised at both shareholder and underlying company level (including de-grouping charges). However, companies are currently also able to use restructuring to achieve the same effect, relying on share for share exchange arrangement (particularly liquidation demergers under S110 Insolvency Act 1986 and capital reduction demergers). These restructurings are likely to be affected by the proposals in Chapter 2 and, therefore, the government is keen to ensure that the statutory demerger provisions (which are currently not well-used) do not act as a barrier to business reconstructions. The government therefore wishes to re-examine the rules to ensure their effectiveness and has put forward a list of potential amendments.

Chapter 4 (Income Tax treatment of distributions from non-UK resident companies) covers the income tax treatment of dividends and other distributions from non-UK resident companies and seeks views on aligning this with the treatment of dividends and other distributions from UK resident companies. For example, the consultation notes that the charge to income tax on dividends from non-UK resident companies developed separately as a charge on income from foreign possessions and is not aligned with the wider charge to income tax on dividends and other distributions from UK resident companies.

For distributions from UK tax resident companies, a statutory definition is used, covering a wide range of transfers and transactions to, very broadly, ensure that extractions of value from continuing companies are charged to income tax. In the case of distributions from non-UK resident companies, the charge to income tax is much narrower, and only dividends which are not of a capital nature are brought into account. Where an income tax charge doesn’t apply, the distribution is instead charged as a capital receipt. The result is that two substantially similar payments to a UK resident shareholder can be treated very differently for tax, with the one from a non-UK resident company having a more favourable tax treatment than the one from a UK resident company. The consultation notes that this can incentivise businesses to utilise non-UK resident companies rather than UK resident companies and to extract money in forms other than dividends. The government is exploring aligning the tax treatment to remove this distortion.

Extractions which do not fall within the charge to income tax often result in capital distributions, which are instead subject to 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. However, the consultation recognises that whether payments are dividends, and whether or not those dividends are of a capital nature, is a question of UK law determined by reference to the characteristics of the transaction under the law under which the company is incorporated and the legal mechanism by which the payment is made. Other jurisdictions’ company law can often be significantly different to UK company law. This can lead to costly and time-consuming uncertainty for taxpayers and to disputes with HMRC. Given this background, the government is exploring how the underlying definition of distribution in CTA 2010 Part 23 could be improved to ensure it operates as effectively as possible in relation to distributions from non-UK jurisdictions with their own company law codes.

Chapter 5 (Interaction between debt, loans and the distributions legislation) looks at the interaction of the distributions regime with the treatment of debt and loans and proposes introducing a priority rule as to when extractions should be charged under the loans to participators regime. Alternative options considered 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.

Chapter 6 (Loans and other temporary extractions from non-UK resident companies) looks at loans from companies that are not UK resident but otherwise would meet the close company criteria and considers introducing rules to address long term extractions. The loans to participators regime charges close companies at the dividend upper rate on loans made to and debts incurred by participators. Close companies are, broadly, UK resident companies which are controlled by five or fewer participators or by any number of directors who are participators. This long-standing regime recognises that loans to shareholders can represent the extraction of profits from the company that would otherwise not be charged to tax. It applies a temporary tax which will be refunded to the company when either the loan or advance is repaid. There is no equivalent charge on loans or advances made by closely controlled non-UK resident companies. This means that a shareholder or associate can take funds from those companies for personal use on a long-standing and often permanent basis without incurring a tax charge.

As part of the wider proposal to reform the tax treatment of distributions from non-UK resident companies, the government is considering whether to introduce a regime for loans or advances made by non-UK resident companies that would otherwise be close to their participators and associates of participators. This would apply to loans or advances from companies that would be close if they were UK resident. Since non-resident companies are not usually within the charge to UK tax, any charge on the loan, and the relief due upon repayment, would need to be on the UK resident person and paid through their tax return, rather than the company.

Chapter 7 (Purchase of Own Shares rules) addresses the POS rules and suggests changes to bring more clarity and ensure the rules remain appropriately focused. Where a company makes a purchase of its own shares, any excess paid over the amount of capital originally subscribed for the shares is generally a distribution. However, there are special provisions in CTA 2010 s.1033 that can enable a company to undertake a purchase of its own shares without making a taxable distribution. If the requirements are met, such payments are taxed as capital rather than as a distribution. The relief is intended to facilitate the departure of a shareholder from a company for the benefit of the company’s trade and the current rules relate largely to satisfying a subjective ‘trade benefit test’ which is explained in HMRC’s Statement of Practice 1982 and is a significant source of dispute between customers and HMRC. The government intends to replace the trade benefit test with a more mechanical set of requirements, to improve clarity.

Chapter 8 (Updated capital extraction anti-avoidance) considers the transactions in securities (TIS) anti-avoidance provisions and how these could be modernised to better tackle avoidance. The government considers that the TIS rules reflect an outdated approach to anti-avoidance legislation and can be difficult to apply, which makes them less effective than intended in relation to certain structures. To better reflect contemporary business structures and to provide a more flexible and modern framework in which to tackle avoidance, the government therefore intends to amend or replace the TIS rules with an updated anti-avoidance regime. The new rules are expected to be clearer and more principles based. They will tackle scenarios where a taxpayer is party to arrangements that enables them to extract value from a company and avoid paying tax.

The proposals set out in the seven Chapters are being consulted on because of their complexity and the need for the government to have a clear view of the impacts of any change before proceeding. The consultation stresses that it will only move forward with proposals provided that commercial activity is not adversely affected and after wider impacts on growth and investment are fully considered.

While there are questions specific to each chapter, there are several broad areas which the government invites respondents to reflect on throughout.

The distributions rules are strongly linked to underlying company law, and how such foundational regulation operates both in the UK and overseas can often be highly relevant. The government welcomes input from stakeholders to ensure the proposals are effective and practical.

The proposals are not intended to impact legitimate commercial restructurings, and the government is keen to understand the wider impacts of these proposals on corporate groups, their owners and how they choose to operate.

The focus of this consultation is on individual shareholders and the proposals are not intended to affect corporate shareholders directly. The government considers that the general exemption from tax under CTA 2009 Part 9A should ensure this, but welcomes responses highlighting any unintended consequences.

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