HMRC consultation on taxation of distributions: Simmons response

Simmons & Simmons has responded to HMRC’s consultation on the modernisation of the taxation of distributions and repayments of capital from companies published on 23 June 2026.

The consultation seeks views on proposals to:

(A) review the treatment of ‘new consideration’ and ‘repayments of capital’ in certain scenarios;

(B) align the tax treatment of distributions from non-UK resident companies with that of distributions from UK resident companies;

(C) review the interaction of the distributions regime with the loans to participators regime, and how the loans to participators regime might be extended to cover loans received from non-UK companies; and

(D) reform the demergers provisions, the Purchase of Own Shares (“POS”) relief, and the Transactions in Securities (“TIS”) rules.

Our comments on the proposals note that the “frozen capital” mechanism proposed in Chapter 2 abandons the certainty of the current system in favour of one which will often require taxpayers to obtain historic information that is difficult (or practically impossible) to locate, and which will result in unfair outcomes for third party purchasers. We are not in favour of this proposal and do not consider that the consultation has shown that the scale of the underlying problem justifies that significant adverse trade-off, particularly given the transactions in securities legislation could be applied in a more targeted manner to address the situations identified as resulting in unfair outcomes in favour of taxpayers.

The proposal to remove the capital reduction route for demergers before a statutory alternative has been trialled and tested in practice risks leaving genuine business separations without a workable method for a considerable period. We are not, therefore, in favour of this change. However, to the extent that this approach is to be implemented, we would recommend an appropriate transition period when the current rules remain available in parallel and, following the end of the transition period, that some form of temporary clearance service be put in place to enable taxpayers to achieve the necessary certainty of treatment.

We do not consider that the consultation demonstrates the case for aligning the income tax treatment of non-UK resident company distributions with UK resident company distributions and are not in favour of this proposal. As currently drafted, we consider that the consultation may inadvertently impact offshore funds, private fund structures, investment managers, and UK investors in overseas listed companies, impacting the competitiveness of the UK as a jurisdiction.

We are broadly supportive of the aim of removing genuine uncertainty around improper and inadvertent distributions, but we consider that the measures suggested by the consultation are insufficiently targeted and risk stifling genuine business activity. We therefore recommend that these measures be further reviewed, with a view to a subsequent, more targeted, consultation.