Amid all the noise around Tax Update 2026, one consultation has had less attention than it probably deserves.
While reforms to VAT, PAYE and ITSA payments have dominated the coverage, HMRC has also proposed a substantial rework of how companies are taxed on distributions and repayments of capital.
For businesses considering a share buyback, demerger or return of capital, the proposals matter.
HMRC has been clear that shareholders themselves are not the intended target, but the rules that govern how these transactions are structured are set to get considerably tighter.
Why HMRC wants to act now
The rules currently in place have barely changed since Corporation Tax was first introduced in 1965 and HMRC argues they were never built for how companies operate today.
As things stand, two transactions that look nearly identical on paper can be taxed in very different ways, purely because of a minor technical detail.
That inconsistency has, over time, opened the door for individuals and trusts to benefit from the lower tax rates that apply to capital rather than income.
HMRC is now consulting on how to close that gap and build something simpler. Responses are being accepted until 14 September.
Ending the holding company workaround
A key proposal addresses a common planning technique: inserting a holding company above the company making a distribution to boost what HMRC terms “good capital” and reduce the tax due on a capital reduction.
Under the new rules, that workaround would disappear. Shares would instead be given a frozen capital value, fixed at the amount originally subscribed, regardless of any new holding company sitting above them.
This lines up with how Capital Gains Tax already treats the original base cost, so the outcome matches what would happen if the shares had been sold back directly. HMRC says genuine business restructuring will not be caught by this change.
A fresh look at non-UK distributions
There is also a proposed shake-up of how distributions from companies based outside the UK are taxed.
UK resident companies already follow a well-defined set of rules that bring value extractions into the Income Tax net.
Companies resident overseas currently face a much narrower charge, applying only to dividends deemed not capital in nature, which has created confusion for years. HMRC wants to iron this out.
The end of the non-statutory demerger route
Businesses have historically been able to use capital reductions to carry out demergers without going through the formal statutory process.
Under the proposals, that route would be closed off entirely, leaving the statutory demerger process as the only option.
As a trade-off for easing some of the statutory demerger conditions, HMRC plans to scrap the automatic right to appeal to a Tribunal where clearance for a statutory demerger is refused.
The consultation also covers changes to how close company distributions are treated, along with amendments to the transactions in securities legislation, both worth reviewing depending on your business structure.
Nothing to action yet, but worth watching
These proposals are still at an early stage and the final version could look quite different by the time it reaches a Finance Bill.
There is nothing you need to do right now, but if a buyback, demerger or capital reduction is part of your plans, this is a consultation worth following.
Get in touch with our team if you would like to talk through what these changes could mean for you.
