HMRC consultation on shareholder tax reforms: implications for transactions and tax planning

On 23 June 2026, HMRC launched a consultation on modernising the tax rules governing distributions and repayments of capital from companies. The proposals represent one of the most substantial reviews of the distribution regime since the introduction of Corporation Tax in 1965 and, if implemented, could fundamentally reshape future tax planning, business reorganisations and shareholder transactions.

The government’s stated objective is to improve clarity, consistency and fairness within the tax system by addressing areas where it believes existing legislation has failed to keep pace with modern commercial practice. HMRC considers that economically similar transactions can currently produce very different tax outcomes depending on their legal form, creating complexity and opportunities for tax-driven structuring.

7 key shareholder tax reforms businesses should understand

The consultation considers seven principal areas:

1. Returns of share capital: changing how the tax rules determine what part of a share buy-back or other capital repayment is taxed as capital, rather than as dividend income.
2. Company demergers: modernising the statutory tax reliefs for separating businesses, alongside possible restrictions on commonly used non-statutory demerger arrangements.
3. Company purchases of own shares (CPOS): revising the conditions under which a shareholder selling shares back to the company can receive capital gains treatment rather than being taxed as receiving a distribution.
4. Transactions in Securities: modernising the anti-avoidance rules that can apply where arrangements convert what would otherwise be income into capital.
5. Loans to shareholders: clarifying how the distribution rules interact with the existing tax rules applying when a close company makes a loan to a shareholder or other participator.
6. Loans from overseas companies: introducing rules to address loans made to UK individuals by non-UK companies that would be treated as close companies if they were UK residents.
7. Distributions from overseas companies: bringing the Income Tax treatment of dividends and other distributions from non-UK companies more closely into line with the rules for UK companies.

Importantly, the proposals are aimed primarily at individual and trust shareholders, with HMRC indicating that corporate shareholders are not intended to be directly affected.

How could the proposed shareholder tax reforms affect businesses and shareholders?

Several proposals could significantly alter established methods of planning for and implementing transactions.

In particular, HMRC’s proposed changes to the taxation of returns of share capital could restrict the use of capital reduction demergers, which have become a common route for achieving the commercial separation of businesses. Recognising that this could increase reliance on the statutory demerger rules, HMRC is also considering whether those rules should be modernised and made more flexible.

One potential concern is that the ‘more flexible’ statutory demerger proposals currently include a five-year restriction on certain onward sales and changes of control.  As many capital reduction demergers are undertaken ahead of the sale of part of a business, this could significantly restrict pre-sale planning opportunities and potentially lead to higher levels of tax.

If the revised statutory demerger proposals are too restrictive for practical purposes, businesses would be forced to consider alternative routes that are more complex and expensive, all of which would be contrary to HMRC’s stated intention of ensuring that genuine commercial activity is not adversely affected.

The consultation also raises the possibility of tightening the conditions under which a CPOS qualifies for capital gains treatment. This could reduce the opportunities for departing shareholders to benefit from lower capital gains tax rates rather than dividend income tax rates.

HMRC is considering limiting capital gains treatment to shareholders who:

• have held at least 5% of the company’s equity for two years;
• have worked for the company during that period; and
• dispose of their entire shareholding.

A two-year period may be allowed to complete the buy-back where the company does not immediately have sufficient cash or distributable reserves.

These proposals could cause difficulties for family-owned companies where shares have passed down through generations, and small holdings are held by non-working family members. A CPOS currently provides a straightforward way of acquiring those interests and consolidating ownership. While alternative routes may be available, few are as simple and efficient, and these are again likely to involve additional complexity and cost.

The consultation, therefore, gives a clear indication of the direction of travel. If enacted, some of the proposals would make established tax outcomes more difficult to achieve and could materially affect future business reorganisations, shareholder exits and pre-sale planning.

what’s next for hmrc’s shareholder tax reforms consultation?

The consultation runs until 14 September 2026, after which HMRC will review the responses and consider whether legislative changes should be introduced. However, HMRC has informally acknowledged the scale and complexity of the project and indicated that there is no fixed timetable for implementing any reforms. The consultation process may therefore continue beyond the formal closing date, allowing HMRC to take the time necessary to engage with stakeholders and develop the proposals.

Given the breadth of the proposals and their potential impact on business restructuring and shareholder planning, advisers and other interested parties should consider the proposals carefully and actively engage with the consultation. We will continue to monitor developments closely and assess how any changes may affect our clients. If implemented, the reforms could reshape the taxation of shareholder returns for many years to come.

Key takeaways

• HMRC has launched a consultation on reforming the taxation of company distributions and capital repayments. 
• Seven areas of tax legislation are under review, including demergers, company purchases of own shares and Transactions in Securities. 
• The proposals could affect shareholder exits, business restructurings and pre-sale planning. 
• No legislative changes have been announced yet, but businesses should review planned transactions in light of the consultation. 

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. 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, Robert Barrie, a member of our tax services team, or your usual AAB contact.