Consultation outcome

Modernising the taxation of distributions and repayments of capital from companies — Summary of responses

Updated 28 October 2026

1. Introduction

The consultation Modernising the taxation of distributions and repayments of capital from companies ran from 23 June to 14 September. The government set out proposals to reform the tax rules dealing with distributions made by companies to shareholders who are individuals or trusts, many of which have remained largely unchanged since the introduction of Corporation Tax (CT) in 1965.

These rules are broad and are intended to capture any extractions of value from a company to a shareholder in respect of their shareholding, or in respect of debt instruments with equity-like characteristics. These rules are subject to particular exemptions such as when the extraction is in return for new consideration or is a repayment of capital.

While the rules generally operate well, the commercial and legal environment in which they apply has undergone significant change. There are situations where the rules produce distortions, with substantively similar payments receiving different tax treatment.

The government is modernising the rules to ensure they operate as a cohesive system that taxes equivalent payments consistently, provides clear outcomes, and reduces the scope for error and non-compliance, whilst protecting genuine commercial transactions. The consultation highlighted that distinguishing between these circumstances is not always straightforward, particularly where commercial and tax considerations are closely intertwined. The government is therefore committed to continuing to work closely with stakeholders to ensure that any reforms provide clear and workable boundaries.

About the responses

The consultation received 67 written responses, of which the majority were from professional firms or advisers. The government is grateful to all who took the time to respond and share their expertise.

During the consultation period HMRC also held meetings with a number of stakeholders, including round-table events, to discuss the proposals and understand their practical implications.

Overall themes

The majority of respondents agreed with the need to improve clarity, modernise the rules and tackle avoidance. There was also broad recognition that the underlying purpose of the rules around income and capital treatment in this area should be clearer.

Many argued that the answer to the challenges raised in the consultation should be handled purely through anti-avoidance rules, and that mechanical tests risk undermining legitimate commercial transactions. For example, a common theme was that the existing Transactions in Securities (TiS) rules should be strengthened. 

Specific cases were raised around the need to maintain the UK’s attractiveness as a place to invest, particularly in relation to private capital structures and their investors, as well as on publicly listed companies, where it was felt that there was more independent oversight and less direct influence by the shareholders. 

Recent and ongoing changes in related areas were also noted, such as to the reconstructions anti-abuse rule in section 137 of the Taxation of Chargeable Gains Act (TCGA) 1992, and the consultation on reform to the taxation of UK-resident members of Limited Liability Companies (LLCs) and other reverse hybrids. Respondents felt that stability, certainty and coherence should be prioritised across such changes.

Overview of next steps

The government intends to proceed with all seven proposals as a cohesive package, reflecting the interlinked nature of the reforms. This will include some changes to the policy designs, informed by stakeholder feedback.

These reforms bring the rules up to date and ensure similar transactions are taxed consistently, regardless of legal form, company residence or transaction structure, giving businesses more clarity and certainty. At the same time, the government is committed to protecting genuine commercial activity and maintaining the UK’s competitiveness as a place to build businesses and invest, and this will be done with targeted reliefs and additional flexibility.

In recognition of stakeholders’ need for certainty and to allow for precise details to be worked through, the government will carry out a technical consultation in 2027, including on draft legislation.

The government intends for the changes to apply prospectively from April 2028, following completion of the technical consultation.

HMRC will work with relevant stakeholders on updating and producing guidance in advance of commencement to help support customers through the changes. The government will consider the impact of other work that might be relevant to the affected population, such as the LLC consultation, to ensure coherence across the policies.

Question 1: How do any of the proposals outlined in this document impact Corporation Tax payers?

Respondents felt that direct CT consequences would mostly be limited given the exemptions in Part 9A of the Corporation Tax Act (CTA) 2009 and the Substantial Shareholding Exemption (SSE).

A small number of scenarios were identified where CT liabilities might arise:

• where capital treatment currently benefits from SSE but the dividend exemption does not apply
• small companies receiving non-UK distributions
• close company loan interactions
• certain investment fund and private equity arrangements

Respondents primarily raised concerns about increased complexity for companies and possible behavioural impacts. Specific concerns included a possible increase in administrative burdens, such as by requiring the tracking of historic capital, or whether there might be more uncertainty in terms of the treatment of historic transactions or the standards that apply to clearances. There were also worries over potential impacts on group restructuring if there are changes to the tax consequences of demergers.

Government response

The government is committed to a simpler, fairer and more modern tax system. These reforms modernise outdated rules and ensure similar transactions are taxed consistently, providing more clarity for both individuals and businesses. 

The government has noted stakeholder concerns in relation to CT payers and will consider these carefully during development of the final policy. Changes will not apply retrospectively or require companies to analyse their historical capital. HMRC will work with relevant stakeholders on updating and producing guidance in advance of commencement to help support customers through the changes.

Demergers are addressed in the responses to Chapters 2 and 3.

2. Reduction of capital

The government set out proposals to reform the treatment of ‘new consideration’ and ‘repayments of capital,’ to promote more consistent tax outcomes and reduce opportunities for shareholders to use corporate restructuring to extract value from continuing businesses at lower effective tax rates.

This included changing existing rules so that share buybacks and other returns of capital reflect a ‘frozen’ amount of capital on the shares in any future holding companies at the amount subscribed for in the original investment.

Question 2: What general comments do you have on the proposal to modernise the rules determining the size of a distribution on a reduction of share capital or share buyback?

Question 3: Please describe how this proposal might impact legitimate corporate demergers and share restructuring

Question 4: Can you anticipate any other unintended or unwelcome consequences of this proposal, such as on third party sales?

A key concern for many respondents was that reductions of capital are used to facilitate corporate restructurings, particularly capital reduction demergers, which were described as a widely used and tax-efficient method of demerging. Respondents were concerned that if this route triggered an income distribution, it could discourage genuine commercial transactions unless the statutory demerger route was sufficiently liberalised to compensate.

Respondents warned that removing capital reduction demergers without sufficiently broadening the statutory route could force businesses into the more costly liquidation demerger route. They said this could reduce investment, growth and merger and acquisition activity; make the UK less attractive for holding companies; and make sales, succession planning and shareholder separations harder. These concerns were particularly acute for listed companies, which are already subject to stringent regulations. Some also suggested that restricting post-demerger sales could reduce Capital Gains Tax (CGT) receipts.

Respondents generally considered the example in Chapter 2 to be avoidance, and that dealing with those circumstances would be better addressed through the existing Transactions in Securities rules or a new targeted anti-avoidance provision.

Respondents raised concerns that if implemented, ascertaining the original share capital might be challenging in long existing groups where the companies have undergone multiple reorganisations.

Respondents also highlighted that a mechanical rule with no exemption for third-party sales and the administrative burden of tracing capital through historic ownership could deter third party buyers. Suggested mitigations included rebasing ‘frozen’ capital on third-party acquisitions, exemptions for intra-group share exchanges, and retaining a more limited capital reduction route with a motive test for genuine commerciality.

Government response

The government intends to proceed with the proposal to limit the amount treated as a repayment of capital following a share reorganisation to the capital originally subscribed by shareholders. This will reduce the scope for companies to extract value from continuing businesses at capital rates.

The government recognises that tax-efficient commercial demergers use tax planning that may be affected by this in a way not intended by these reforms. The government considers the best approach to ensure commercial demergers are not affected is through changes to the statutory demerger rules (more detail is set out in Chapter 3) and will continue to engage on this during technical consultation to ensure that the boundaries are drawn in the right place. Attempting to distinguish commerciality through anti-abuse rules would bring less clarity than the proposed change, which is accompanied by a relaxation of the dedicated relief.

The government agrees that listed companies should not be in scope. These companies have more complex capital structures and are subject to greater regulation. The government therefore considers that it would be disproportionate to bring listed companies within the scope of this proposal. It will engage with stakeholders on the details of how this will work in practice as part of the technical consultation.  

For non-listed companies, the government notes that there will continue to be no immediate tax charge on company reconstructions where there are no extractions and the Purchase of Own Share (POS) rules apply. Chapter 7 sets out proposed changes to the POS rules to ensure coverage of genuine exits. 

The government intends to only apply this change to share re-organisations undertaken after the legislation comes into force and will not require companies to analyse their historic share capital and share premium.

3. Demergers

Recognising that the consultation’s proposals, particularly those in Chapter 2, would limit opportunities for non-statutory demergers, the government sought views on how to ensure that the statutory demerger rules provided the necessary coverage to ensure no interference with genuine commercial activity and investment.

Question 5: Do you think that the statutory demerger rules ought to apply to a broader scope of transactions?

Question 6: In what scenarios would you currently undertake or recommend a non-statutory demerger?

Question 7: What comments and suggestions do you have regarding the amendments suggested above to the statutory demerger legislation?

Question 8: Are there any other specific parts of the legislation which you think the government should re-examine?

Question 9: In what way do you think the demerger rules ought to be liberalised in order to account for the removal of capital demergers?

Question 10: Do you anticipate any unintended consequences as a result of the proposals set out in this chapter?

Respondents supported broadening the statutory demerger rules regardless of whether the proposals discussed in Chapter 2 proceed. Respondents said the different conditions and tax treatments for statutory and non-statutory demergers make the current system complex and generally favoured more consistent tax outcomes across the available routes.

Respondents explained that demergers are undertaken to facilitate various aims, such as to separate trading activities from property or investments with different risk profiles; to prepare part of a company or group for sale; to separate activities between shareholders or resolve disputes, and to support succession and inheritance tax planning. 

Respondents identified several barriers to the current statutory demerger conditions. These include the need for sufficient distributable reserves, the restriction around separating trades, the limits on subsequent sales or a change of control, and the complexity of the chargeable payments regime. As a result, the statutory demerger route is available infrequently, and non-statutory demergers are therefore recommended by agents in the majority of circumstances. 

Of the alternatives to statutory demergers, capital reduction demergers were preferred to liquidation demergers, which are seen as more costly and potentially damaging to the business’s reputation. Several respondents noted that statutory demergers are simpler and more cost-effective where their conditions can be met, so wider availability would be beneficial to businesses. 

Respondents supported extending the rules to non-UK companies and to a wider range of activities, including investment businesses. Removal of the trade benefit test was welcomed, as was allowing the distributing company to be dissolved in specified circumstances.

However, respondents considered a five-year restriction on sales or changes of control disproportionate and potentially unworkable. Some suggested a two-year period; others favoured testing intention at the time of the demerger so that later unforeseen events would not withdraw relief. Some were concerned that control could not pass to family members.

Most respondents opposed replacing “all or substantially all” with “all”, as a small interest may need to be retained for commercial or company-law reasons. 

Many also suggested that the 75% subsidiary condition should be relaxed to include 51% subsidiaries. 

Most opposed removing the right to have a clearance application considered by the First-tier Tribunal, viewing it as an important independent safeguard; an internal HMRC review was suggested as an alternative if the tribunal route were to be removed.

Many respondents suggested that the chargeable payments regime should be reviewed and potentially removed. Additionally, many requested that the interaction of the demerger rules with other taxes and reliefs was carefully considered, particularly Stamp taxes, losses and the degrouping charge.

Government response

The government will modernise the statutory demerger relief so that companies and groups can more easily undertake commercially desirable demergers. The government is taking into account respondents’ comments from both Chapters 2 and 3 and will ensure that a route is provided to achieve commercial demergers, whilst ensuring that the rules are targeted at their intended purpose. The relief will apply in a much broader set of circumstances, and the government will explore further in technical consultation how to reduce the areas of friction that currently deter companies from using it.

The government recognises the representations made by stakeholders on the importance of demergers in achieving onward sales. It will therefore allow demergers made in advance of onward sales to qualify in some circumstances, such as the sale of divisions of trading groups to third parties, and will consider this further in technical consultation.

The government will not change “all or substantially all” to “all”, in recognition of the issues this could cause. 

The government will consider the impacts of relaxing the 75% subsidiary condition during technical consultation.

The government recognises the feedback in respect of the procedure to transmit clearance applications to the First-tier Tribunal. It intends to review this in the round alongside parallel processes across statutory clearances. The current process leads to substantial delay for customers, and decisions are not published so can be inconsistent and have no wider application for HMRC or taxpayers. The right to request transmission to Tribunal is available for some clearance provisions and not for others; this disparity causes taxpayer confusion. The government will engage with stakeholders during technical consultation to see how these issues might be resolved while still ensuring that customers have appropriate safeguards.  

While the consultation did not specifically mention the chargeable payments provisions, most respondents raised it as a substantial barrier to the use of the statutory regime. The government will consider replacing these provisions with a simpler and more proportionate rule and will engage on this during the technical consultation.

4. Income Tax treatment of distributions from non-UK resident companies

The government proposed aligning the treatment of distributions from non-UK resident companies with those of UK resident companies. This will remove distortions that mean two substantially similar payments to a UK resident shareholder can be taxed differently, with those from a non-UK company receiving a more beneficial tax treatment. 

The consultation sought views on the impact of this alignment on commercial transactions and whether there would be tensions with corporate legislation in non-UK jurisdictions.

Question 11: Do you have any general comments on aligning the charge to Income Tax on distributions from non-UK resident companies with the rules that already apply to distributions from UK-resident companies?

Question 13: Do you anticipate this proposal deterring any commercial corporate actions? If so, please provide details and suggestions of how this impact could be addressed.

General stakeholder comments

Respondents broadly understood the aim of aligning the treatment of distributions from UK and non-UK resident companies. However, most substantive responses opposed blanket alignment or requested significant safeguards. 

Some respondents expressed strong preferences for avoiding any change in this area and addressing any concerns by reforming the TiS rules, whereas others supported alignment in principle if accompanied by clear classification and “safe harbour” rules. 

While some respondents indicated that the current position for determining whether a payment was income or capital was clear, this was generally in relation to companies with clear mechanisms for share buybacks or reductions of capital. Other respondents highlighted the difficulty of getting appropriate foreign legal advice to inform the tax treatment. 

Respondents also highlighted that shareholders may need historic information on subscriptions, share premium, bonus issues and reductions of capital that overseas companies may have never recorded in the same way as UK companies. In particular, minority investors, pooled fund investors and shareholders in long-established companies might not be able to obtain the necessary information to calculate the capital on the shares. Respondents indicated the need for practical guidance from HMRC in this matter. 

Some respondents also highlighted the need to address overlap with the LLC consultation, reviews of reverse hybrids, the Transfer of Assets Abroad rules and other offshore attribution regimes.

Impact on the investment funds and private capital industry

Many responses, including those from industry bodies, raised concerns around the impact on investment funds and private capital, as such structures commonly use overseas master holding companies. The view was that tax treatment of distributions from companies in these jurisdictions is generally well understood under the current rules and provides an established route for returns to be extracted in capital form, usually through share buybacks. Respondents said the proposed changes would have impacts on retail investors as well as fund managers and executives.

The dominant view of these respondents was that these structures follow the policy that investors in these structures should be taxed broadly as if they held the underlying assets directly. Respondents highlighted evidence that UK tax policy takes account of these capital or income returns, such as the Reporting Funds Regime and the Qualifying Asset Holding Company (QAHC) regime. The Reporting Fund Regime in particular is designed to prevent the accumulation of income returns to be realised as capital, while the UK-based QAHC regime preserves the capital treatment of redemptions and buybacks.

Respondents noted that fund managers are commonly required to invest personal capital alongside external investors (co-invest) and dividend treatment could reduce the UK’s ability to attract and retain internationally-mobile investment professionals. 

Respondents also emphasised the importance of considering the potential implications for capital available to UK businesses, UK competitiveness and funds with long-term binding commitments. They noted that it would be extremely difficult to address the impacts on UK investors through restructuring if the proposed changes were introduced, as funds have global investor bases and fiduciary duties to investors as a whole. 

The strong preference of these stakeholders was to retain the current rules and address abuse through anti-avoidance provisions. Alternatives included carve outs, QAHC-equivalent treatment for overseas asset-holding companies, protection for regulated or genuinely diverse investment funds, substantial exemptions for existing structures or look-through rules to preserve the income or capital character of the underlying return.

Double taxation

Question 12: Can you foresee this proposal having any impact on obtaining relief for double taxation where the distribution is subject to tax in another state?

Respondents highlighted that if the source state treats a receipt as capital while the UK treats it as income, the applicable treaty article and availability of credit relief may change. This was generally thought to be manageable if addressed in statute.

Definition of ‘dividend’ and ’return of capital’

Question 18: Do you have any comments on the potential tensions between the definitions used in the UK distributions rules and non-UK corporate legislation, especially with regard to the distinction between income and capital? In particular, are there any difficulties around what constitutes a ‘repayment of capital’? How could these be addressed?

Question 19: Do you have any insights from other jurisdictions which also use the capital/income divide in their tax legislation?

Question 20: Are you aware of any particular existing difficulties around whether a distribution from a non-UK incorporated company is a ‘dividend’? Should the government consider introducing provisions to clarify the treatment where the non-UK company law is unclear?

There was broad agreement that overseas company-law mechanisms do not map neatly onto the UK categories of ‘dividend’, ‘other distribution’ and ‘repayment of capital’. Some jurisdictions have no par value, or have freely distributable share premium, solvency-based distribution regimes, or no requirement for formal liquidation before a company ceases. 

Some respondents expressed support for a carefully framed deeming provision where the position under non-UK law was unclear and there was no direct equivalent of a UK dividend, capital reduction or repayment of capital as it could reduce the need for shareholders to obtain detailed foreign-law advice for each payment. These respondents considered that any rule would need detailed guidance and worked examples, a reasonable-belief “safe harbour” for shareholders relying on issuer or adviser information, and potentially a clearance mechanism or for HMRC to publish decisions by transaction type and jurisdiction. 

Other stakeholders queried the rationale for introducing clarifying provisions, including whether legislation could improve the existing case law approach for determining whether a payment is an income dividend or a return of capital, which emphasises the legal mechanism. 

The impact of these authorities on particular facts was not interpreted consistently across the responses. In addition, while some respondents viewed the framework established by these cases as workable but complex, others considered the issue more problematic, highlighting difficulties with establishing the position under non-UK law.

Stock dividends

Question 14: Do you have any comments on the proposal to extend the charge to stock dividends? In particular, are there difficulties with the classification of shares in non-UK jurisdictions?

Respondents highlighted that stock or scrip may be structured differently overseas, and it may be difficult for shareholders to identify that a taxable transaction has taken place. Respondents asked for statutory rules, detailed guidance, ‘safe harbours’ and, in some cases, reporting thresholds. 

Some respondents supported alignment where shares are issued from profits, but said that any element funded from paid-up share capital or otherwise representing a genuine return of capital should not be taxed as income.

Bonus shares and securities

Question 15: Do you have any comments on extending the charge to redeemable bonus shares and securities?

Respondents noted that extending the charge would create two potential taxing points — issue and redemption — and that shareholders in overseas companies may struggle to identify that a taxable instrument had been issued. The underlying complexity was also highlighted. 

Respondents also sought confirmation that the existing section 401 Income Tax (Trading and Other Income) Act (ITTOIA) 2005 credit mechanism would apply and that any overseas tax on redemption would be available.

Special securities and non-commercial loans

Question 16: Do you have any comments on to what extent the charge to Income Tax on distributions should apply to payments on special securities and non-commercial securities?

Question 17: Do you have examples of where instruments that would be treated as special securities and non-commercial securities are used in existing structures where the return would be paid to UK residents within the charge to Income Tax?

Most respondents who answered these questions supported extending the distribution charge only when needed to address a genuine distortion. Many payments on these instruments are already taxed as interest and the issuers will be outside the UK tax system. 

If these instruments are brought within the distributions code, existing exclusions for listed instruments or commercially priced returns may need adaptation for overseas securities.

Use of nominal share capital

Question 21: When calculating what amount of a distribution is a repayment of capital, would it be effective to permit small shareholders in widely held or quoted companies, who do not have access to the necessary information, to simply use the nominal value of the interest they hold on a share buyback? Are there any difficulties with calculating the nominal value of the share in some jurisdictions?

Many respondents supported a general fallback position in cases where shareholders cannot reasonably obtain the information required to calculate the capital element of a distribution. However, while some supported using the nominal value as a pragmatic solution, respondents raised concerns that this did not go far enough as the nominal capital is often far below the amount subscribed and would not address the treatment of no-par-value shares or capital contributions which are not reflected in nominal value.

Alternative suggestions included allowing shareholders to use the amount subscribed, the acquisition cost, nominal value plus share premium, the local stated capital account, or other reasonable basis calculations. 

Some respondents also suggested expanding the scope of the easement beyond small shareholdings in listed companies, whereas others favoured criteria such as percentage holdings or listings on recognised stock exchanges.

Government response

The government is grateful for respondents’ engagement on this complex issue. While it acknowledges calls to prioritise updated anti-avoidance rules, its view is that there is a more fundamental mismatch between the treatment of UK distributions and non-UK distributions that requires more substantive reform. It therefore intends to bring section 1000(1)B, G and H Corporation Tax Act (CTA) 2010 distributions from non-UK resident companies into the charge to Income Tax. 

The government is committed to the continued competitiveness of the UK fund management sector and has taken significant steps to enhance the UK’s attractiveness as an investment management hub. The government does not intend for these reforms to undermine the UK’s international competitiveness. As such, returns on asset managers’ co-investment, and genuine investment returns in fund structures will continue to receive capital treatment in situations where that is available under the current rules. The government will continue to engage with stakeholders to consider how this objective is achieved through legislation, how that approach best accommodates the different structures that are used to facilitate fund investment, and whether there are further impacts of the proposed reforms that are specific to the private capital sector and could conflict with the objectives set out above.

As set out in the consultation, the government will introduce a charge for stock dividends and will refine this through technical consultation. Guidance will be produced to assist stakeholders in establishing their tax position.

The government is still considering whether to extend the charge to cover bonus issues of shares or securities under section 1000(1)C and D or interest or other distributions under section 1000(1)E or F, or whether to introduce a more targeted rule to address avoidance.

It is clear from the responses that there is difficulty with applying the definitions of ‘dividend,’ ‘share capital’ and ‘repayment of share capital.’ While the current position is reliant on the characterisation of the payment under non-UK corporate law, the implications are often unclear, and this can produce distortive outcomes both in the taxpayer’s favour and against. The government will explore how to provide greater clarity and a reasonable framework for shareholders with smaller interests. 

The government is grateful for comments concerning issues around gaining relief for double taxation and will consider how best to address any issues. It will co-ordinate any approach with the outcome of the LLC consultation. 

Responses were broadly in favour of allowing minor shareholders to use nominal capital when calculating taxable distributions. The government will explore how best to implement this and any options for expanding this treatment during the process of technical consultation.

5. Interaction between debt, loans and the distributions legislation

The government proposed clarifying the legislation to establish the priority of whether charges fall under the loans to participators or distributions regime. The current uncertainty can cause issues when determining the correct treatment of dividends which are found to be unlawful.

The consultation sought views on how these issues are addressed by businesses in practice and whether the proposed changes would provide a solution.

Question 22: Are you aware of instances where dividends or other distributions have been improperly paid? If so, were the distributions repaid to the company and on what timescale? What was the tax treatment generally adopted on the repayment?

Question 23: Would priority rules to establish what the primary charge will be on an extraction address the issue? Are there any adverse consequences to this?

Question 24: Do you have any views as to whether legislating for the current discretionary practice of unwinding unintentional gratuitous transfers would provide a solution?

Question 25: What are your views on allowing Income Tax paid on an unlawful distribution to be set off against liabilities incurred on rectifying the issue?

Question 26: What alternative solutions might be implemented to address the issues raised in this chapter?

The majority of respondents were supportive of the proposals made in this chapter. 

Most of the respondents, particularly those supporting smaller businesses, had seen issues arising from the payment of distributions which were later found to be unlawful. These arose in a variety of situations, such as where the company had insufficient distributable reserves to pay dividends or redeem share capital and where the company law formalities had been improperly executed.

Respondents generally indicated that unlawful distributions were usually inadvertent rather than avoidance-driven and are often discovered during the preparation of accounts, HMRC enquiries, or due diligence several years later.

Some respondents agreed that, as not all distributions made improperly will need to be repaid, there can be uncertainty over which tax charge applies. They also noted that this can result in simultaneous charges on the company and shareholder; that interest and penalties can arise before an error is discovered; and that historic transactions can be difficult to correct once amendment and overpayment relief deadlines have expired. It was suggested that directors and shareholders might be more incentivised to regularise the position if they were not faced with adverse tax consequences.

Most respondents favoured a combination of the proposals, including rules that establish which charge takes priority, putting the current non-statutory treatment of inadvertent distributions on a statutory footing, and giving relief for tax previously paid rather than relying on one measure alone. 

Some respondents considered that HMRC should make no change in this area as ensuring that a payment is lawful is the responsibility of the directors.

Government response

The government intends to proceed with these changes. We will refine the design through further technical consultation with stakeholders, considering how best to protect the Exchequer by preventing arbitrage while ensuring shareholders and companies are not taxed twice on the same transaction. The government will take a final decision on which options to proceed with during technical consultation. 

While the consultation primarily discussed the interaction between income distributions and debts, several of the transactions that respondents raised as examples involved capital distributions, such as void share buybacks. The government will consider extending any reform to capital distributions.

6. Loans and other temporary extractions from non-UK resident companies

The government proposed introducing a regime for loans or advances made by non-UK resident companies (that would be close if UK resident) to their UK resident participators and their associates. The charge and subsequent relief would follow the design of the current loans to participators regime. The consultation recognised that the close company and loans to participators rules are broad and may not align with non-UK structures. 

The consultation sought views on the potential administrative difficulties of the proposal, and whether respondents could foresee impacts on arm’s length commercial lending. 

The consultation set out four options.

1. A charge under section 455 CTA 2010 arises on the loan or advance and is paid by the individual that receives it if it is outstanding at the 31 January after the end of the tax year in which it is made. Any release or write-off of the loan or advance would be chargeable under section 415 of ITTOIA 2005 in the same way as a loan or advance from a UK resident company.
2. A charge under section 455 CTA 2010 arises on the loan or advance and is paid by the individual if it is outstanding after a set period from the time the loan was made, for example, 3 years. Any release or write off would be chargeable under section 415 ITTOIA 2005.
3. No charge is due on the loan or advance as it arises, but any release or write-off of the loan or advance would be chargeable under section 415 ITTOIA 2005.
4. Alongside option 3, the loan is deemed to be released or written off if it has not been repaid to the company after a set period of time, such as five years.

Question 27: Given that the tax would need to be paid by individuals rather than by the companies making the loans, would this result in particular administrative difficulties? If so, please provide examples.

Question 28: What general comments do you have on the proposal to introduce a temporary tax on loans received from non-UK resident closely controlled companies?

Question 29. Do you have any specific comments on the four options outlined above? Do you have any suggestions as to what time periods would be appropriate?

Question 30: The close company definition is extremely broad. Can you see this proposal affecting loans made on arm’s length terms to participators with very minor interests, and if so, can you provide examples?

Question 31: What impacts would the proposal have on arm’s length commercial lending?

Question 32: Would limiting this charge to participators and associates of participators with material interests in the overseas companies help to target this at loans which represent extractions of profit?

Question 33: If we expand the exclusion for loans or advances made in the ordinary course of business, what changes would be necessary to avoid curtailing normal commercial activity?

Most respondents to this chapter accepted that loans or advances made by non-UK closely controlled companies represented an extraction risk but were of the view that a broad replication of the loans to participators regime, would be difficult to administer and would have an impact on substantial commercial activity. There was some support for a more closely targeted regime with appropriate exclusions for genuine commercial activity and loans made to minor participators or their associates. 

Some respondents were of the view that HMRC could address risk using existing anti-avoidance rules, rather than introducing a new regime which could cause uncertainty and administrative burden.

Concerns focussed on the breadth of the close company definition, particularly where there are partnerships in the structure, which is particularly common in the funds industry. Respondents indicated that this may mean that participators may not be able to determine whether a company is close or whether a loan is taxable if they are unable to access company information located in an overseas jurisdiction.

Some respondents also queried how to obtain double taxation relief if the loan is subject to tax in the source jurisdiction.

Adaptations from the UK based loans to participators regime

Most respondents supported restricting the regime to borrowers with meaningful ownership or influence on the underlying company making the loan. The 5% material interest threshold set out in the consultation was generally regarded as an appropriate starting point, although some respondents advocated for a higher threshold. There was general support for amending the rules to address the attribution of partnership interests where the participator would otherwise have a minor interest or where the company is otherwise widely held. 

Some respondents also supported excluding interest-bearing loans made at arm’s length.

Commercial arrangements

There was some concern that this charge would catch commercial lending, such as intra-group loans, treasury movements or upstream loans if the loan or advance would have fallen within section 459 CTA 2010 (indirect loans to participators). There were also concerns around loans made to fund co-investment in funds at market value, management buyouts and loans provided to invest in the employer’s shares and loans made to employees to help them relocate to the UK.

Proposed options

Of the four proposed options, no clear option was preferred. 

1. Option 1 received some support because it most closely resembles the domestic regime. However, some respondents raised the point that it would impose tax too quickly on short term loans, create cash-flow costs and require information that may not be available by the filing deadline. 
2. Some respondents indicated a preference for Option 2 as it gave more time for the participator to repay the loan or advance. 
3. Option 3 was regarded as the simplest option, but respondents noted that an enforceable loan could remain outstanding indefinitely without a charge.  
4. Option 4 was generally opposed as the debt could remain legally enforceable and commercially serviced. Some respondents suggested longer time periods, or that the deemed write-off only apply if there was no clear intention to repay.

Other points

Respondents also raised the need for clarity with the interaction with the Transfer of Assets Abroad rules, the Foreign Income Gains regime, employment income, disguised remuneration and the rules for taxation of non-resident trusts.  

Practical concerns included the mechanism for relief of the tax when the loan or advance is repaid, the impact of foreign exchange rates when the loan is made in a currency other than sterling and whether historic loans will be included in the charge.

Government response

The government has considered respondents’ comments and intends to introduce a charge on loans or advances (including debts incurred) made from non-UK resident companies, including a charge on the release or write-off of the debt akin to section 415 ITTOIA 2005. This addresses a route for extracting sums from companies on a longstanding or permanent basis without a charge to tax, which is not available to participators in UK resident companies. The charge will be temporary, and as with the charge under section 455 CTA 2010, will be repayable when the loan is repaid, released or written off. 

This will not be in complete alignment with the charge on loans from UK resident companies, as the charge will be on the individual rather than the company making the loan and the company will be outside the scope of UK tax. 

The government is grateful for respondents’ comments on the scope of the charge and the comments on how best to restrict the application to transactions which are more likely to represent extractions of value.  

In particular, reflecting stakeholder feedback, the government considers that it may be appropriate to limit the temporary charge to loans or advances to participators (or associates of participators) with material interests, and to loans that are not made for the commercial purposes of the company’s business. The government will consider appropriate boundaries for any exclusion through further technical consultation. 

The government will also consider whether the interests of partners in a partnership will be excluded when calculating whether a person has a material interest in a company. This limitation should exclude most minor investors and loans that stakeholders identified as particularly administratively burdensome. The government will continue to review this position through further engagement. 

The government welcomes respondents’ comments on the practical operation of the charge and relief. These will inform the design of the charge and relieving provisions; more details of the approach will be developed during further technical consultation.

7. Purchase of Own Shares (POS) rules

The government proposed modernising the POS legislation to bring greater clarity, as well as ensure it better meets its original intention: to facilitate the departure of a shareholder from a company for the benefit of the company’s trade.

The consultation sought views on potential changes to Condition A of the POS rules to replace the largely subjective ‘trade benefit’ test with more mechanical requirements, and on the unintended consequences of this change.

Question 34: What general comments do you have on the proposals set out in this chapter?

Question 35: What unintended consequences do you anticipate as a result of these changes?

The majority of respondents support the move away from the subjective trade benefit test and thought mechanical conditions gave more certainty. They welcomed the recognition of a multiple tranche payment method to recognise situations where funds are not immediately available to buy back shares.

However, some of the proposed requirements were considered potentially too restrictive in certain circumstances. Specific concerns were raised regarding excluding third-party investors, shareholders in employee share schemes, minority shareholders, multigenerational shareholders in family companies, company founders, and those not currently working in the company. Respondents suggested that if the requirements become too restrictive, some companies might instead use other more complex or costly routes to receive capital treatment.

Some respondents questioned the rationale for extending the requirements to five years where the departing shareholder retains family connections with remaining shareholders and directors, considering it disproportionate and discouraging legitimate succession planning.

Many respondents did not agree on a full exit or the need to immediately resign as director as businesses often need time for a smooth transition, or because financial or other contracts specify that a person remains. Also, the majority of respondents requested easements if a person returns within five years for commercial reasons, such as where a company is in difficulty and requires their experience. 

Government response

The government will proceed with reform of the POS rules. The government recognises the importance of ensuring that the reformed rules continue to support genuine business succession, including where family-business owners are passing ownership to the next generation. We will engage with stakeholders to refine the technical detail, and consider whether any adjustments are needed to ensure the rules protect genuine family-business succession, while preventing arrangements that allow company profits to be extracted at capital rather than income tax rates.

The government notes that respondents raised some concerns about the 5% minimum shareholding requirement. The relief was originally intended to facilitate the exit of shareholders with a sufficient level of influence in the company (the trade benefit test), rather than for it to apply to every shareholder. The government identified 5% as the right level for the majority of transactions but will engage with stakeholders on whether this strikes the right balance between allowing minor investors to obtain capital treatment and maintaining the intended focus of the relief.

The government recognises that a person may leave employment for a number of reasons some time before disposing of their shares in the company. It therefore intends to relax the requirement that a person must have been an employee for the two years immediately prior to the sale, with the detailed approach to be refined through technical consultation.

Respondents had concerns about the proposed restriction on individuals returning to employment or as a shareholder in the company following the disposal, particularly where a founder needs to support the company during a transition period. The government recognises this concern and will explore through technical consultation whether the restriction should allow a former shareholder to support the business as a consultant for a period without resuming employment or shareholding.

The government remains committed to employee share ownership and will continue to work with stakeholders to understand the impact of the reforms on employee-owned businesses.

The government specifically recognises that the reforms as currently proposed may impact shareholders who have acquired shares through tax advantaged employee share schemes such as Enterprise Management Incentives, Company Share Options Plans, Share Incentive Plans and Save As You Earn, as well as investors who have provided funds through the Enterprise Investment Scheme and Seed Enterprise Investment Scheme. These schemes play an important role in helping businesses recruit, retain and reward employees, supporting investment, productivity and growth. The government does not intend for the reforms to undermine the schemes’ viability or attractiveness. The government will continue to work closely with stakeholders throughout the technical consultation to ensure that the reforms achieve their policy objectives while preserving the benefits and incentives that these schemes provide to businesses, employees and investors.

8. Updated capital extraction anti-avoidance

The government proposed amending or replacing the current TiS rules with a more modern, principles-based anti-avoidance regime. Should shareholders undertake a transaction that would be countered by existing legislation, then that legislation would take effect in priority; if that other legislation is unsuccessful in countering the transaction, then this new legislation could apply.  

The consultation sought views on any unintended consequences of updating TiS, particularly the need to ensure that any changes do not adversely affect genuine commercial activity such as corporate restructurings.

Question 36: What general comments do you have on the proposal set out in this chapter?

Question 37: What unintended consequences do you anticipate as a result of this proposal?

The consultation did not include details of any proposed changes and instead focused on the wider idea of whether a change was required and whether it would be welcomed. The overwhelming majority accepted that there was still a need for an anti-avoidance provision but noted that without any detail, specific comments could not be provided at this time. There was a clear desire for further consultation to take place as the area develops.

In addition to keeping an anti-avoidance provision, respondents felt that strengthening it was preferred to some of the other proposals, especially Chapter 2 (Reduction of capital). A robust anti-avoidance regime which covers the minority of avoidance cases was a clear preference to a substantial rule which would apply to all.

Most respondents stressed the need for any new regime to retain a clearance provision so as to provide certainty to those potentially in the scope of the rules. Another common suggestion alongside this was to bring the rules within the self-assessment system, which could make them easier to understand and administer.

There was a balanced split amongst respondents as to whether an entirely new principles-based drafting was preferable to retaining and improving the nucleus of the current rules. Many see the current rules as overly complex and so difficult to give advice on, whereas others saw the years of jurisprudence as something to retain. A general advisory point arose that shares are used for investment purposes and investment supports the wider economy.

Government response

The government intends to proceed with reform of the TiS rules to bring more clarity and make them more robust. It will present more detailed proposals during the technical consultation. The government will consider bringing the regime into self-assessment as part of this work.

9. Next steps

The government is grateful to all those who responded to the consultation and participated in discussions with HMRC. The responses provided detailed evidence on how the current rules operate in practice and highlighted the importance of ensuring that reform delivers greater clarity without creating disproportionate barriers to genuine commercial activity.

The government has carefully considered these responses and intends to proceed with a package of reforms. These have been modified where appropriate to reflect the evidence received during the consultation, including to ensure the continued attractiveness of the UK as a global financial centre. 

The final design will seek to target the identified risks while protecting legitimate transactions and minimising unnecessary administrative burdens. This will provide businesses and shareholders with greater certainty about how different transactions will be taxed.

The government believes that, taken together, these reforms will produce a clearer, more coherent and consistent framework for the taxation of distributions and repayments of capital from companies, while maintaining an appropriate balance between supporting genuine commercial activity, maintaining UK competitiveness, and protecting the Exchequer.

HMRC will reach out to stakeholders in early 2027 for further discussion. Draft legislation will be published for technical consultation before the changes are implemented. This will provide a further opportunity for stakeholders to comment on the technical details of the reforms, including their interaction with existing legislation, with a particular focus on boundaries to avoid unintended consequences. HMRC will continue to engage with interested parties throughout this process and will publish guidance in advance of commencement where this is needed to support understanding and compliance. 

A technical consultation will take place in 2027, with the new rules to commence from April 2028.

Annex A: List of stakeholders consulted

The government is grateful for the contributions of those who responded to the consultation, who have been listed below. This list does not include those respondents that asked for their response to be kept confidential or responses from individuals.

Addleshaw Goddard LLP

Alvarez & Marsal Tax LLP

Ashurst Perkins Coie UK LLP

Association of Investment Companies (AIC)

Association of Taxation Technicians (ATT)

Azets Holdings Limited

BDO LLP

Beavis Morgan LLP

Blick Rothenberg Limited

Burges Salmon LLP

CBI

Centre for the Analysis of Taxation (CenTax)

Chartered Institute of Taxation (CIOT)

Claritas Tax

Clarke & Co

CMC Markets plc

CMS Cameron McKenna Olswang Nabarro LLP

Crowe UK LLP

Deloitte LLP

DLA Piper UK LLP

Duncan & Toplis

Ernst & Young LLP (EY)

Eversheds Sutherland

Forsters LLP

Forvis Mazars

Freshfields LLP

FTI Consulting LLP

Gowling WLG (UK) LLP

Grant Thornton UK Advisory & Tax LLP

Institute of Chartered Accountants in England and Wales (ICAEW)

Institute of Chartered Accountants of Scotland (ICAS)

KPMG LLP

Law Society of Scotland

Linklaters LLP

Lumiere Tax LLP

Macfarlanes LLP

Menzies LLP

Mercer & Hole

MHA Advisory Limited

Moore Kingston Smith LLP

Old Mill

Oldfield Advisory LLP

Permira

PM+M

PricewaterhouseCoopers LLP

RSM UK Tax and Consulting LLP

Saffery LLP

Shoosmiths LLP

Sidley Austin LLP

Simmons & Simmons LLP

Slaughter and May

Society of Trust and Estate Practitioners (STEP)

Sumer Group

The City of London Law Society (CLLS)

The Law Society of England and Wales

Travers Smith LLP

UK Private Capital

Unity Advisory

Vortax Ltd

Wattcrafts Engineering Ltd

Wilson Partners Limited