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Proposed changes to how share buybacks, demergers and other returns to non-corporate shareholders are taxed signal a significant shift from capital to income rates
HM Revenue & Customs (HMRC) is consulting on modernising the taxation of distributions and repayments of capital made by companies to shareholders who are individuals or trusts. The proposals could significantly affect the taxation of common corporate transactions, and therefore how they are structured, including reductions of capital, share buybacks and demergers.
HMRC considers that the current rules have not kept pace with the commercial and legal environment, with the result that economically similar payments to non-corporate shareholders can receive different tax treatment – some taxed as capital (at lower rates, with reliefs potentially available) and others taxed as income (at higher rates).
Key proposals include:
- Reductions of capital – HMRC aims to reduce the scope for shareholders to extract value from a continuing business at capital rates through reductions of capital, particularly through the practice of inserting a new holding company above the distributing company (thereby, under the current rules, creating an uplift in capital which can later be returned to shareholders in capital form). It is proposed that share buybacks and other returns of capital would instead reflect a ‘frozen’ amount of capital on the shares in any new holding company, based on the amount originally subscribed, so that the insertion of a holding company does not change the tax outcome for shareholders.
- Demergers – HMRC plans to remove the capital reduction route commonly used for non-statutory demergers. This would increase reliance on the lesser-used statutory demerger route. To facilitate this, it is proposed that the statutory demerger conditions would be “liberalised” and clarified, although the current right of direct appeal to the First-tier Tribunal if clearance is denied would be removed.
The consultation closes on 14 September 2026. No timetable for the introduction of any of the proposals has been set out.
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