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      As part of its Budget publications, the Government has shared its response to the consultation on modernising the taxation of distributions and repayments of capital from companies. While respondents generally supported greater clarity and tackling avoidance, concerns were raised about protecting genuine commercial transactions and UK competitiveness.

      The Government intends to proceed with all seven proposals, albeit with modifications following consultation. A technical consultation, including draft legislation, is planned for 2027, with the new rules expected to apply from April 2028.

      Our previous articles considered the original consultation and its potential implications (“HMRC consultation into taxation of dividends and repayments of capital” and “Taxation of distributions and returns of capital”). So, what has changed following the Government’s response?

        Capital reductions and demergers

        The Government will proceed with limiting the amount treated as a repayment of capital following a share reorganisation to the capital originally subscribed by shareholders. Listed companies will be excluded, and the response suggests that this change will apply only to reorganisations after the legislation comes into force, avoiding the need to analyse historic share capital and share premium. The latter could offer a significant carve-out so the details of these provisions will be key.

        Recognising the potential impact on commercial demergers, the Government intends to broaden statutory demerger relief. In particular, demergers ahead of onward sales will be permitted in some circumstances.

          Distributions from overseas companies

          The Government will proceed with bringing certain distributions from non-UK resident companies within the income tax charge, addressing what it considers to be a mismatch between UK and overseas company distributions.

          However, following concerns from the funds and private capital sector, returns on asset managers’ co-investments and genuine investment returns in fund structures will continue to receive capital treatment where that treatment is available under the current rules. How this protection operates will be developed through the technical consultation.

          A charge for stock dividends will also proceed, although the Government is still considering the appropriate treatment of certain bonus shares, securities, interest and other distributions.

          Loans and unlawful distributions

          Changes will also address interactions between distributions and loans, including circumstances where distributions are subsequently found to have been unlawful. The objective is to prevent shareholders and companies being taxed twice on the same transaction, with the precise mechanism still to be determined.

          A new temporary, repayable charge will apply to loans and advances from non-UK resident companies to UK participators. Following stakeholder feedback, the Government is considering limiting this to participators with material interests and excluding loans made for genuine commercial purposes.

          Purchase of own shares and anti-avoidance

          Reform of the purchase of own shares rules will proceed, while further consideration will be given to genuine family-business succession, the proposed 5 percent minimum shareholding requirement and employees who leave before selling their shares. The Government also intends to protect the attractiveness of tax-advantaged employee share schemes and EIS and SEIS investment.

          Finally, the Transactions in Securities rules will be reformed, with detailed proposals to follow and possible consideration of bringing the regime within self-assessment.

          What happens next?

          Much of the detail remains to be settled. HMRC intend to engage with stakeholders in early 2027 before publishing draft legislation for technical consultation.

          Businesses contemplating capital reductions, demergers, share buybacks or other returns of value should therefore monitor the technical consultation closely. International structures, investment funds and family businesses may also wish to assess transactions planned around the proposed April 2028 commencement date as the detailed boundaries and reliefs become clearer.

          For further information please contact:

          Our tax insights

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