ICAS responds to HMRC consultation on modernising the taxation of distributions and repayments of capital from companies

We have responded to HMRC’s consultation on modernising the tax treatment of company distributions and repayments of capital. We support evidence-based reform, but some proposals could disrupt legitimate business restructuring without a clearly demonstrated need. We’re calling for targeted rules, workable demerger routes, clear cross-border guidance and continued access to statutory clearances and safe harbours.

The consultation, published on 23 June 2026, covers a broad range of issues, including capital reductions, demergers, purchase of own shares, loans to participators, non-UK resident companies and the future of the Transactions in Securities (TiS) regime.

It represents one of the most significant reviews of the distributions regime in recent years and seeks views on proposals to update parts of these rules where the government considers legislation has not kept up with commercial practice. 

The government’s objective is to remove what it believes to be inconsistencies in the tax treatment of economically similar forms of company value extraction in the hands of shareholders who are individuals. 

Concerns over the proposed capital repayment reforms

The consultation suggests that shareholders can, in certain circumstances, obtain capital treatment on amounts that are economically similar to distributions, particularly following transactions involving share-for-share exchanges and holding company insertions. HMRC proposes measures that would effectively “freeze” the capital represented by shares for these purposes.

Our response acknowledged the policy objective but questioned both the scale of the perceived problem and the evidence supporting reform. We note that no data has been provided demonstrating widespread misuse of the existing rules, nor is there clarity on what specific forms of tax planning HMRC has concerns about. Consequently, our response argued that a targeted anti-avoidance provision would be a more proportionate response than what appears to potentially amount to a “policy sledgehammer to crack an imaginary nut”.

Defence of capital reduction demergers

Our response focused strongly on the implications of the proposals for capital reduction demergers. These have become the principal method by which private companies achieve business separations and pre-sale reorganisations since the introduction of the Companies Act solvency statement procedure in 2008. We argued that these transactions are now a well-established and commercially important restructuring mechanism which have largely replaced the more expensive and cumbersome liquidation demerger route under section 110 of the Insolvency Act 1986.

The consultation proposals would effectively curtail the capital reduction route and could force businesses back towards older and costlier structures, removing the considerable flexibility that taxpayers can currently have by using capital reduction demerger routes. We emphasised this loss of flexibility in our response, warning that removing it would increase costs, reduce commercial options and potentially “wind the clock back” by reversing two decades of progress in corporate reconstruction practice. The accompanying risk of rendering a substantial body of accumulated professional expertise redundant would be undesirable.

We also warned that proposals to remove or restrict legitimate business planning could discourage investment and entrepreneurial activity, contrary to wider economic objectives.

Reform of statutory demergers

We welcome proposals to relax some conditions for statutory demergers. However, we do not believe that the suggested changes would adequately compensate for the loss of capital reduction demergers. Member feedback indicates that statutory demergers remain relatively unattractive because of restrictive conditions and practical difficulties, including the chargeable payments rules. We recommend removing the unnecessary restrictions.

In particular, we expressed concerns about proposals that would impose restrictions on future sales following a demerger. We are concerned that a proposed five-year limitation could create commercial difficulties for family businesses and other private companies facing changing circumstances. Our response suggests that a blanket restriction risks preventing entirely commercial transactions that arise unexpectedly after a demerger has been completed.

Overall, we argued that if HMRC wishes to discourage the use of capital reduction demergers, the statutory alternative should be made significantly more flexible and accessible than is currently proposed.

Invalid distributions and unwinding transactions

Our response reflected broad support for the proposals aimed at dealing with unlawful or invalid distributions. We noted that practitioners do encounter situations where company transactions, particularly share buybacks, have not been implemented correctly. In such cases, current practice often involves treating the amount as a loan, potentially creating a charge under section 455 of the Corporation Tax Act 2010, with the loan being repaid/written off at a later date.

We also support the proposal to place HMRC’s existing discretionary practice of unwinding unintentional gratuitous transfers onto a statutory footing. We consider this a sensible development but stressed in our response that comprehensive guidance for taxpayers from HMRC would be essential if the proposal is implemented.

Our response also indicated our support for allowing income tax previously paid on an unlawful distribution to be offset against later liabilities arising when the transaction is corrected. We consider that such a mechanism would help avoid the risk of double taxation, especially where the time limit for amending the original self-assessment return has already expired.

Loans to participators and non-resident companies

The consultation also considers extending rules analogous to the loans-to-participators regime applicable to UK resident close companies to situations involving non-UK resident companies that would be close if they were UK resident. We do not object in principle to the policy direction and we recognise that there may be cases where the absence of equivalent rules produces inequitable outcomes.

Our response did however warn that implementation could be highly complex. It highlighted the need for detailed HMRC guidance explaining how UK tax rules would interact with foreign company law, overseas tax regimes and loans from hybrid entities, and the Foreign Income and Gains (FIG) regime. Without such guidance, taxpayers and advisers could face significant uncertainty.

We also expressed reservations in our response about imposing tax liabilities directly on individuals in relation to outstanding loans. Concerns were raised that borrowers may not have the resources to fund a tax charge, particularly where the underlying funds have already been spent. We suggested that alternatives based on loan release or write-off events may produce more practical outcomes.

Purchase of own shares (share buybacks)

We expressed reservations in our response about the proposed changes to the purchase of own shares rules that currently allow certain share buybacks to be taxed as capital rather than income. We acknowledged that the existing trade benefit test can be subjective and sometimes difficult to apply, though also noted that advisers and HMRC have developed substantial practical experience in operating the current regime. We have concerns about unintended behavioural changes, including encouraging taxpayers to undertake more complex “Newco” acquisition structures in place of straightforward share buybacks that could result from replacing the existing framework.

The proposal to introduce a minimum 5% shareholding requirement and a requirement that the departing shareholder must have been employed by the company for at least two years was highlighted in the response as a particular concern. We believe that these conditions would represent a significant narrowing of access to capital treatment. In many family and owner-managed businesses, shareholders who are not employees can currently use share buybacks as an efficient mechanism for succession planning and ownership transitions. The proposed changes would remove that flexibility for many such cases and have implications for shareholdings of trusts or executries and estates.

We questioned the rationale for the proposed two-year employment requirement and the requirement that phased exits must be completed within a two-year period. Our response noted that shareholder disputes and succession arrangements are often complex and that an exiting shareholder may have little control over the timetable. We are concerned that denial of capital treatment could arise simply because a commercial exit takes longer than the proposed statutory period.

Our response also includes concerns about the proposed 5% ownership threshold. We consider it inequitable that a shareholder with a 4% holding could lose access to capital treatment altogether while a 5% shareholder could continue to qualify. The response also highlighted the compliance costs that could arise from valuation requirements and suggested that HMRC should provide clear guidance on the steps companies would need to take to demonstrate that consideration paid for the buyback does not exceed market value.

Our response raises potential unintended consequences from the proposals, such as restricting the use of employee incentive arrangements such as hurdle shares and growth shares, potentially undermining a mechanism widely used by growing businesses to attract and retain talent. We also highlight the risk that the proposed restrictions on former shareholders returning as directors could adversely affect genuine commercial situations. For example, a retired owner-manager might need to return temporarily to help a business through a family emergency, parental leave period or other unforeseen event. Under the proposed rules, such a return could jeopardise capital treatment previously obtained on the buyback. We argue that the proposed five-year restrictions on returning to the business would be unnecessarily rigid and could create difficulties for family-owned companies.

Finally, while not specifically mentioned in the consultation we have also suggested that the Government should consider relaxing the existing “undue hardship” test within the inheritance tax-related buyback provisions to assist family businesses facing increased inheritance tax liabilities following recent changes to business and agricultural property reliefs.

Transactions in Securities

The consultation includes a proposal to replace or significantly reform the Transactions in Securities (TiS) regime. Our response questioned why a long-standing regime that practitioners generally view as functioning effectively is considered no longer fit for purpose while also noting that relatively little detail on the proposed replacement regime was included in the consultation. The absence of detail makes it difficult for stakeholders to assess the practical implications or propose workable alternatives.

Our members' experiences suggest that the current TiS regime benefits from statutory clearance procedures and well-established legislative safe harbours. These give taxpayers and advisers greater confidence when undertaking commercial transactions.  We cautioned that removing them and replacing them with a more principles-based anti-avoidance framework could increase uncertainty and professional risk and urged HMRC to retain both statutory advance clearance mechanisms and legislative safe harbours if reform proceeds.

In conclusion

We support simplification of the tax system where genuine problems exist but have always argued that reform should be evidence-based, proportionate and commercially realistic. Our response to this consultation recognises HMRC’s desire to modernise rules that date back some time, yet repeatedly questions whether the consultation has demonstrated a sufficient case for changes that could significantly disrupt established business restructuring practices.

We support the continued availability of capital reduction demergers. Based on the information in the consultation, we also favour retaining the certainty of the existing TiS clearance regime. If the proposals proceed, HMRC must provide clear and effective guidance for taxpayers.

Read our response to the consultation and our earlier overview of HMRC’s proposals. 

Let us know your views

We respond  tax consultations and calls for evidence and attend meetings with HMRC at which service levels, delays and other issues you raise with us are discussed. We welcome input from members to inform our work. Email us to share your insights and feedback.