Guidance

Modernising the Distributions Framework Factsheet

Published 28 October 2026

• The government is modernising the rules that determine how distributions from companies to their individual (non-corporate) shareholders are taxed. 
• The changes will ensure that similar transactions are taxed consistently regardless of how the company or transaction is set up legally, or where the company is based.  
• These rules have remained largely unchanged since 1965 and have not kept pace with modern commercial arrangements. 
• The government consulted on these changes and has published a summary of responses at Budget 2026. Ahead the reforms taking effect from April 2028, we will continue to engage with stakeholders on the detail including by publishing draft legislation for technical consultation in 2027.

What are distributions?

• A distribution is the transfer of money or assets from a company to its shareholders. The most well-known example is a dividend, but the rules also cover other ways shareholders can take value out of a company, such as share buybacks.  
• The tax system is designed to tax income and capital gains in different ways, reflecting differences in the underlying economic substance. The distributions rules aim to distinguish between taking profits out of a company, which is generally taxed as income, and making a gain when shares are sold, which is generally subject to Capital Gains Tax (CGT). 
• In most circumstances this is straightforward, and in more complex or unusual circumstances tax advisers will provide help supported by public HMRC guidance. These reforms will provide greater clarity and certainty to ensure transactions are taxed consistently according to their underlying economic substance.

What is changing? 

• Taxing extractions of profits fairly and consistently - some business owners can use complex arrangements, including setting up a new holding company, to take profits out of their business as a capital gain rather than income. We are changing the rules so that profits are taxed consistently based on the nature of the transaction. 
• Payments and loans from overseas companies - payments or loans from an overseas company can be taxed differently from an equivalent payment from a UK company. We are bringing the rules into closer alignment so that equivalent transactions are treated more consistently. 
• Exits and reorganisations – some rules have not kept up with modern commercial practice and can impede activity. We are modernising the Purchase of Own Shares (POS) relief and expanding the demergers relief to better support genuine exits, demergers, and similar commercial transactions 
• Modernising distributions rules – existing anti-avoidance rules can create uncertainty about how transactions will be taxed. We are updating these, so they are clearer and work better for businesses.

What is not changing? 

• There are no changes to dividend income tax or CGT rates. These changes clarify how existing tax rules apply to payments made to shareholders.  
• There are no changes to ordinary dividend payments. These will continue to be taxed as dividend income. 
• Gains on ordinary sales of shares will remain subject to the CGT regime. These reforms do not change that treatment when business owners sell their shares to another person or business. 
• Shareholdings in listed companies will not be affected by the changes to the rules on reductions of capital. Individual shareholders in listed companies generally cannot control how profits are returned to them or access the tax advantages these changes seek to address. 
• The reforms will not affect how asset managers are taxed on genuine investments they make alongside their funds. This will protect the UK’s international competitiveness in this crucial area of the economy.

Who will be affected by these changes?   

• The changes will mainly affect shareholders who have control over how profits are paid out from their companies and are able to structure this to secure more favourable tax treatment that is not available to other taxpayers.  
• This will mainly be in connection with one-off events, such, as shareholder retirements or capital reorganisations. 
• Some individuals with interests in overseas companies will also be affected. This includes people receiving certain payments or loans from overseas companies that would be taxed differently if they came from a UK company.

Example of unfairness under the current system  

• Olivia owns a furniture business. She wants to take £200,000 of accumulated profits out of the company. She takes the money out in the usual way, as a dividend, and pays dividend income tax. 
• Tom owns a similar business and wants to take out £200,000 of accumulated profits. As part of an earlier restructuring, Tom was advised to consider a more complex arrangement where a new holding company is introduced, and Tom swaps his existing shares for shares in the holding company. The holding company then buys back some of his shares for £200,000, allowing Tom to pay CGT rather than dividend income tax under the current rules.  
• In substance, Olivia and Tom have both taken £200,000 of profits out of the business. Tom isn’t avoiding tax, but his tax planning lets him access a lower tax rate on his profits.   
• If Tom was genuinely selling on his business, he would still pay CGT after these changes.

Will these changes affect family businesses passing the company on to their children?  

• No, the reforms are designed to protect genuine family succession. The objective of the reforms is to reduce opportunities for well-advised taxpayers to extract profits using structures that give them more favourable tax treatment that is not available to other taxpayers.
• There are many ways to transfer ownership of a business, including to the next generation of a family. Most of these will not be affected by these reforms. Parents will still be able to gift or sell shares in the business to their children under the existing rules. Where Gift Hold-Over Relief applies, any CGT can effectively be deferred until the child later sells the shares. Where parents use other more complex transfers that are in scope of the reforms, these will continue to receive capital treatment where there is a genuine change in ownership.
• The government recognises that holding-company structures can be used as part of legitimate family business succession, including where the company helps fund a retiring owner’s exit. The changes to POS rules have been designed with these circumstances in mind and are intended to protect family business succession, including by allowing qualifying company-funded exits to be completed in stages so that ownership can pass in an orderly way, while spreading the call on the company’s cash and distributable reserves. 
• The government recognises the importance of ensuring that the reformed rules continue to protect genuine business succession, including where family-business owners are passing ownership to the next generation. The government will use the technical consultation to test the detailed operation of the new conditions and whether any adjustments are needed to ensure they protect genuine family-business succession, while preventing arrangements that allow company profits to be extracted at capital rather than income tax rates.

Will stakeholders be engaged through this process?   

• Yes, the government has engaged with stakeholders through the consultation process and will continue to engage further to ensure the reformed rules operate as intended. 
• Draft legislation will be published for technical consultation in 2027, giving businesses, advisers and representative organisations a further opportunity to share their views before the changes take effect from April 2028.