HMRC proposing changes to how capital is released from companies

HMRC is undertaking yet another consultation, this time looking at how distributions and repayments of capital made by companies to their shareholders should be taxed. The proposals are primarily aimed at controlling shareholders and owner-managers of family and other private companies, but company directors may be affected where they are also shareholders or have another financial interest in the company. The intention is to prevent shareholders from taking value from a company that is continuing to trade in a way that is economically equivalent to a dividend but is instead taxed as a capital gain, potentially producing a more favourable tax result for higher and additional-rate taxpayers. These are currently consultation proposals, and would not directly affect ordinary salaries or straightforward, properly declared cash dividends. But they could affect company restructures, share buybacks and other transactions used to release capital.

What does this mean in a practical sense?

For the 2026/27 tax year, taxable dividend income above the dividend allowance is charged at 10.75%, 35.75% or 39.35%, depending on the shareholder’s income tax band. But a capital gain is generally taxed at 18% or 24%, while qualifying gains covered by Business Asset Disposal Relief are taxed at 18%. So, capital treatment can be significantly more tax-efficient in some circumstances, particularly for higher- and additional-rate taxpayers. Where a payment qualifies for capital treatment, the shareholder may also be able to deduct the cost of the shares, use capital losses and claim the CGT annual exemption. But capital treatment isn’t automatically more favourable in every case: for example, the basic dividend rate of 10.75% is lower than the basic CGT rate of 18%. HMRC believes that some restructuring techniques allow shareholders to obtain capital treatment when taking value from a continuing company, despite retaining substantially the same ownership and control of the business. To counter this, HMRC proposes ‘freezing’ the recognised capital amount at the amount originally invested. For example, if someone originally put £100 into a company that has grown to £2m in value, then under the proposed rules putting a holding company above it wouldn’t necessarily create £2m of usable tax capital. Instead, the recognised capital could remain at £100, and any amount taken above this would be considered to be dividend income, and taxed accordingly. However, while this will stop any ‘artificial’ creation of capital, there are concerns that any changes in this area could affect commercial holding company structures created for acquisitions, investment, succession planning or risk separation.

What else is being proposed?

HMRC also proposes widening the statutory demerger rules, as its suggested freeze on recognised capital could prevent or restrict companies from using a capital-reduction demerger to split or demerge a business. Companies may need to split for various reasons, such as when two family members want to run different divisions, following a fallout between shareholders, or when one part of the business is being prepared for investment or sale. But under the proposals, a statutory demerger may not qualify for tax relief if it facilitates an onward sale, a change of control, or a voluntary dissolution or winding-up within five years. The proposals would not stop or delay these events, but if they occurred within five years, it could jeopardise the demerger tax relief. This would make planning more complex, and tax clearance more important. The proposed rules would also affect share buybacks if someone were leaving the company because of retirement or to take another role elsewhere. Other proposals aim to bring the tax treatment of UK and non-UK companies into closer alignment, and to review the way certain shareholder loans are taxed. This includes the interaction between distributions and loans involving UK close companies, which are typically those controlled by five or fewer participators, or by directors who are also participators, as well as loans received by UK residents from equivalent overseas companies. There are other aspects to this consultation, and you would need to respond by 14 September 2026 to have your views taken into account. Disclaimer This article is intended as general guidance only and is based on UK tax legislation, HMRC guidance and Government consultation proposals available at the time of publication. The measures discussed are proposals only and may change before any legislation is introduced. The information provided does not constitute tax or legal advice, and professional advice should be obtained before making decisions based on your individual circumstances.

We can help you meet your obligations

If you would like to know more about how the new proposals might affect your business, then please get in touch and we would be happy to give you the guidance you need.