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      On 23 June 2026, HMRC published a consultation on Modernising the taxation of distributions and repayments of capital from companies. The consultation, which ran until 14 September 2026, sought views on a wide-ranging set of proposals aimed at updating rules that have remained largely unchanged since the introduction of corporation tax in 1965.

      The proposals, which were discussed in more detail in our earlier Tax Matters Digest article, covered the following areas:

      • Reduction of capital – in general individuals will be taxed to income on reductions of capital to the extent the amount received exceeds the original capital contributed to the company, with any other amounts being subject to capital gains tax (CGT);
      • Demergers – the above proposals with respect to reduction of capital will mean that capital reduction demergers (currently the most common way of implementing a demerger) will generally no longer be possible;
      • Purchase of own shares – HMRC are proposing to replace the trade benefit test with a more mechanical test which broadly will require individuals to hold at least 5 percent of the share capital of a company and to exit completely (and for at least five years) in order to benefit from CGT treatment;
      • Distributions from non-UK resident companies – HMRC are proposing the introduction of new rules to bring the treatment of non-UK distribution receipts more in line with the treatment of UK distributions;
      • Loans from non-UK resident companies – HMRC are proposing the introduction of a tax charge (potentially payable by the recipient of the loan) for loans made by non-UK resident closely controlled companies to UK tax resident individuals;
      • Unlawful distributions – HMRC are consulting on the best method (from a tax perspective) to unwind a situation where unlawful distributions have been made; and
      • Transactions in securities – HMRC are considering whether this anti-avoidance legislation will require updating or replacing in light of the other proposed changes.

      HMRC have stressed throughout that this is a consultation and that they are looking to engage with stakeholders before firming up on any of the proposals. To that end, KPMG in the UK has submitted a response to the consultation. In overview, whilst supportive of some of the aims and measures, we are concerned that many of the changes will impact legitimate commercial transactions and potentially have the effect of making the UK’s tax system less competitive. This article summarises some of the key comments made in our response.

      Family businesses and succession planning

      One of the most significant concerns relates to the proposed changes to reductions of capital. Many family business succession arrangements involve the use of redeemable preference shares following family or management buyouts (MBOs). These structures are commonly used to facilitate the gradual retirement of a founder rather than requiring the future owners (often family members or management individuals) to raise immediate cash to purchase the shares.

      Under a typical structure, a retiring shareholder may exchange their holding for redeemable preference shares that can be redeemed over time as cash becomes available within the business. We highlighted that the proposed changes could significantly alter the tax outcome of these arrangements by limiting the amount eligible for capital treatment and subjecting a larger proportion of future redemptions to income tax treatment.

      These changes could therefore place deferred family succession transactions at a disadvantage compared with outright third-party disposals, potentially discouraging intergenerational transfers of ownership.

      Impact on demergers

      The consultation also proposes significant changes affecting demergers. Demergers are one of the primary methods of restructuring businesses prior to a sale, either to separate trades, or remove investment assets. In addition, they are used in family succession planning and other corporate restructurings.

      Currently, the primary method of undertaking demergers is a ‘capital reduction’ demerger. The proposed changes will mean that route is no longer available. Instead, HMRC envisage greater use of ‘statutory demergers’. At present, the requirements attached to statutory demergers are very restrictive meaning that they are not available in many circumstances, including when the demerger is with a view to a future sale.

      HMRC are proposing to expand the statutory demerger regime, and some of these changes are welcome, especially the inclusion of investment activities (currently only trading activities could be demerged via a statutory demerger). However, the proposals could actually make the restrictions even more stringent when the demerger is with a view to sale by imposing a five year period in which a sale etc should not occur. 

      The result of the proposed changes is likely to be a reversion to liquidation demergers. Prior to the advent of capital reduction demergers, these were the preferred method of demerger, but they are often more expensive, more complex and less commercially attractive, particularly for listed groups.

      We therefore recommended that statutory demergers should be liberalised further to accommodate transactions undertaken in contemplation of a sale and to preserve flexibility that businesses currently obtain through capital reduction demergers.

      Investment funds and non-UK distributions

      The consultation’s proposals could also have significant impact on certain private equity structures.

      Many private equity, infrastructure and venture capital funds hold multiple investments through non-UK master holding companies. These structures are adopted for commercial and operational reasons, including simplifying transactions, facilitating governance and easing withholding tax processes in source jurisdictions. Under current rules, these structures will generally result in treatments no worse for most classes of UK investors than if the funds held assets directly. 

      However, the proposed changes to the treatment of distributions from non-UK resident companies could change this position. A key concern is that the changes could treat returns generated through a master holding company that are economically capital in nature as income returns. Further, it may introduce inconsistencies between the position for fund structures that invest directly and those which make use of non-UK master holding companies. We have therefore recommended that careful consideration is given to how investment funds are treated under any new regime.

      We also highlighted concerns regarding the use of preference shares within private equity structures, where they are frequently used to allocate value between different investor classes. Changes to the rules around purchase of own capital could impact on the practicality of such structures.

      Practical compliance concerns were also identified. Investors in pooled fund structures may not have access to sufficient information to determine the capital and income elements of complex distributions if the new rules are introduced.

      Employee share incentives

      Certain of the proposals, if implemented, are likely to have adverse consequences for employee share incentive arrangements. These include:

      • The expansion of the loans to participator regime to non-UK resident close companies. Whilst this proposal may address a genuine concern in relation to some shareholders, it will in principle also catch managers and other employees receiving loans from a non-UK resident company to purchase shares. Read more detail on our views on this proposal in a separate article in this edition; and
      • The proposed changes to the taxation of distributions from non-UK resident companies could also reduce the effectiveness of employee incentives in certain circumstances. Read more detail on our views on the proposals in a separate article in this edition. 

      In light of the concerns referred to above, we have recommended the introduction of exemptions where the relevant shares are acquired pursuant to a bona fide employee share scheme.

      Share buybacks and anti-avoidance

      The proposed changes to share buybacks have some positive features, in particular, the proposal to remove the subjective ‘trade benefit’ test from the purchase of own shares rules, as it can be a significant source of uncertainty for taxpayers and advisers.

      However, the proposals also suggest including new mechanical tests in respect of the purchase of own shares rules, including a proposed 5 percent shareholding requirement and employment conditions. This 5 percent test may create difficulties for minority shareholders and employee-shareholders who often hold much smaller interests, thus depriving companies of a key method of providing liquidity to such shareholders in a tax effective manner.

      In relation to anti-avoidance, the consultation seeks views on replacing or reforming the Transactions in Securities regime. While recognising the importance of protecting the tax base, we questioned whether existing provisions such as the General Anti-Abuse Rule (GAAR) already provide significant protection. If specific anti-avoidance rules are retained, we advocate preserving the ability to obtain statutory advance clearance from HMRC.

      Looking ahead

      The consultation demonstrates HMRCs desire to modernise an area of tax legislation that has evolved over many decades. We support simplification where it reduces uncertainty and makes the regime easier to apply. At the same time, our response highlights the importance of ensuring that reforms do not unintentionally affect areas such as family business succession planning, private capital investment, commercially driven restructurings or employee share ownership.

      It is not clear whether all, or indeed any of the proposals will be enacted. As mentioned at the outset, HMRC have repeatedly reiterated that this is a consultation and not a fait accompli. As such, it is hoped that, in line with our response, the proposals can be refined so that, where appropriate, they retain their essence, whilst avoiding any unwanted commercial impacts.

      For further information please contact:

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