Company distributions and capital repayments: What’s changing?

Earlier this year, the Government consulted on proposals to modernise the tax rules governing company distributions and capital repayments from companies. Following that consultation, it has now published its response and confirmed that it intends to proceed with a package of reforms, with implementation currently planned from 6 April 2028. 

Although some of the original proposals have been modified in response to stakeholder feedback, the changes represent a significant shift in the way certain shareholder extractions will be taxed. The stated aim is to ensure that economically similar transactions are taxed more consistently, regardless of the legal mechanism used or whether the company is UK or overseas resident. 

Why is the Government making changes to company distributions and capital repayments?

The current rules have remained largely unchanged since the introduction of corporation tax in 1965, and the Government considers they have not kept pace with modern commercial arrangements. Its concern is that two shareholders can take the same amount of profit out of a business and end up paying very different amounts of tax, depending on how the transaction is structured. 

The Government’s own example compares two owners of similar businesses who each want to take out £200,000 of accumulated profits. One takes a dividend and pays dividend income tax. The other, following an earlier restructuring, uses a new holding company and a share buyback so that the same sum is taxed as a capital gain. The aim of the reforms is to remove that difference, while leaving genuine commercial transactions alone. 

What is changing with company distributions and capital repayments?

1. SHARE REORGANISATIONS

One of the proposed changes relates to share reorganisations. Under the new framework, where a shareholder receives a repayment of capital following a share reorganisation, the amount eligible for capital treatment will generally be limited to the capital originally subscribed by the shareholder. The Government has confirmed that this restriction is intended to apply only to reorganisations undertaken after the new rules take effect.  

The Government has also agreed that shareholdings in listed companies should fall outside the scope of this change.

2. SHARE BUYBACKS AND DEMERGERS

The reforms will also introduce changes to the rules governing share buybacks and demergers. 

For buybacks, the Government will proceed with reform of the Purchase of Own Shares rules, moving away from the subjective “trade benefit” test towards clearer, more mechanical conditions. It has acknowledged concerns about family succession, minority shareholders and departing founders, and has indicated it will relax some of the proposed requirements. 

A concern with the consultation document was the proposals to significantly alter the process for corporate demergers, potentially limiting the options in future. In response, the Government say they will broaden the statutory demerger relief so that more commercial demergers can use it, including in some cases demergers carried out ahead of a sale to a third party but some concerns remain Details will be worked through in the technical consultation but this is an important aspect we will continue to monitor closely.

3. OVERSEAS COMPANIES

 A new temporary charge will apply to certain loans and advances from overseas companies to UK shareholders, similar to the existing “loans to participators” rules.  

 

What is not changing?

The Government has been clear that: 

• There are no changes to dividend tax rates or Capital Gains Tax rates 
• Ordinary dividend payments will continue to be taxed as dividend income 
• Genuine third-party share sales will continue to be subject to Capital Gains Tax 
• Genuine commercial transactions, family succession arrangements and ordinary investment activity should continue to be protected 

Who will be affected?

According to the Government, the changes will mainly affect shareholders who control how profits are paid out of their company and can structure this to secure more favourable tax treatment than other taxpayers. This will typically arise in connection with one-off events such as shareholder retirements or capital reorganisations. 

What happens next?

HMRC will engage with stakeholders in early 2027, and draft legislation is expected during 2027 for technical consultation, ahead of the planned commencement date in April 2028. The details on the boundaries of the new rules, such as buyback conditions and the scope of the demerger relief, is still to be settled. This means the final position may look different from the current proposals. 

 

Key takeaway

Businesses and shareholders contemplating group reorganisations, succession planning, demergers, share buybacks or capital extraction strategies should consider reviewing their plans well in advance to understand how the proposed changes may affect future transactions and whether any action should be taken before the new rules are introduced. Early review and advice will be important ahead of the changes. 

 

How AAB can help

Early advice can help identify the available options and ensure that any planning takes account of both the current rules and the potential direction of future reform. We can help you to: 

• Review your existing group structure and any planned reorganisation 
• Understand how the proposals could affect a demerger, buyback or shareholder exit 
• Plan family succession and retirement with the new rules in mind 
• Model the tax cost of different ways of extracting value from your company 
• Stay up to date as the draft legislation is published 

If you are considering a business reorganisation, demerger, shareholder exit or other transaction involving the extraction or return of value to shareholders, please get in touch with Kate Naylor, a member of our tax services team, or your usual AAB contact.