On 23 June 2026, HMRC published what may prove to be the most consequential consultation on UK company tax law in a generation. The Modernising the Distributions Framework consultation proposes sweeping changes to the rules governing how value flows from companies to their individual and trust shareholders. If even half of these proposals make it into legislation, the effect on share buybacks, demergers, owner-managed exits, and PE deal structures will be profound. The consultation closes on 14 September 2026. You have 11 weeks to respond — and rather more than that to worry about it.
This is not a routine tidying exercise. The underlying legislation — Part 23 of the Corporation Tax Act 2010 — has in many respects sat untouched since the Income and Corporation Taxes Act 1965. The government is openly acknowledging that the rules are complex, distortive, and no longer fit for purpose. That acknowledgement is overdue. The problem, for those of us who advise on transactions, is that decades of accumulated complexity have been partially tamed by careful structuring. Simplification often means closing the gaps that practitioners have worked around.
Why This Consultation Matters Now
The timing is deliberate. The government’s Tax Update 2026: Simplification, Modernisation and Fairness package dropped on 23 June alongside six other consultations. But the distributions consultation is by far the most structurally significant. The government is explicitly targeting the boundary between capital and income returns to shareholders — a boundary that has shaped exit planning, demerger strategy, and owner-manager tax planning for decades.
For context: when an owner-manager sells shares back to their company (a purchase of own shares), the proceeds can qualify for capital gains treatment — currently taxed at 24% — rather than income treatment at up to 39.25% (dividend rate plus NIC where applicable). The difference matters enormously at exit. HMRC has watched this gap for years. This consultation is the formal opening move to close it, or at least narrow it significantly.
The Seven Areas Under Review
The full consultation document runs to substantial length. These are the areas that will directly affect CFO decision-making:
1. New consideration and repayments of capital. Currently, genuine new consideration received by a company can reduce the amount treated as a distribution. The consultation reviews whether these rules operate as intended, particularly in restructuring scenarios where cash is injected and then extracted in ways that exploit the mechanics. Expect proposals to tighten what counts as genuine new consideration.
2. Distributions from non-UK resident companies. At present, many distributions from overseas companies fall outside the UK distributions code entirely, meaning individual shareholders receive them as capital. The consultation proposes aligning the treatment of distributions from UK and non-UK resident companies — which would bring a wider class of overseas distributions within the income tax charge. For PE structures with offshore holdcos distributing to UK individual LPs or co-investors, this is material.
3. Capital reduction demergers. This is the one that will generate the most immediate anxiety. Capital reduction demergers — where a company reduces its share capital and transfers a subsidiary or trade to shareholders in exchange — have become the dominant demerger mechanism since the Supreme Court’s endorsement of the technique. They are commonly used in PE portfolio separations, family business splits, and pre-sale restructurings. The consultation proposes restricting the capital reduction demerger route and replacing it with new statutory conditions before demerger relief applies. The detail will determine whether legitimate commercial demergers remain viable, but the direction of travel is clearly restrictive.
4. Loans to participators — extension to non-UK resident close companies. Section 455 CTA 2010 charges a 33.75% tax on loans from close companies to their participators, repayable when the loan is repaid. The consultation proposes extending equivalent rules to loans from non-UK resident close companies — closing an obvious gap that offshore structures have exploited. If you operate an offshore holding company that lends to UK individual shareholders or directors, this will change your planning.
5. Purchase of own shares (share buybacks). Capital treatment on a company buyback of shares from an individual currently requires meeting specific conditions — trade benefit test, five-year ownership, no continuing substantial interest. The consultation proposes tighter conditions, focused on genuine shareholder exits, including a near-complete exit requirement and stricter rules where individuals remain connected to the business post-buyback. Management buyout structures that retain some continuing involvement — common in PE-backed transactions — may no longer qualify cleanly for capital treatment.
6. Transactions in securities (TIS) anti-avoidance. The existing TIS rules (ss. 682-713 ITA 2007) allow HMRC to counteract income tax advantages arising from transactions involving shares. The consultation proposes new or supplementary anti-avoidance rules, possibly replacing the existing regime entirely. The TIS rules have always created uncertainty in transactions — a new regime could either improve or worsen that, depending on whether Parliament opts for principle-based or bright-line rules.
7. Merging the loans to participators and distributions regimes. The consultation floats combining the s.455 loans regime with the distributions code to create better alignment. In practice, advisers already need to consider both simultaneously. A merged regime could simplify analysis — or could extend the charging scope in unexpected directions.
The Capital vs Income Battle — Why This Is the Real Fight
Everything in this consultation ultimately circles back to the same tension: the government wants returns of value from companies to individual shareholders to be taxed as income, not capital. Income rates — up to 39.25% on dividends (including NICs on deemed employment income) — are materially higher than capital gains rates at 24% for higher-rate taxpayers. The compliance cost of policing the boundary has historically fallen on HMRC. The consultation is an attempt to move the goalposts structurally, rather than fighting case by case.
This matters for three categories of transaction that I see regularly in CFO and PE advisory work:
- Pre-sale restructuring. Separating a trade from property, or carving out a subsidiary ahead of a sale, frequently uses capital reduction demergers. If that route is restricted, the alternatives — statutory demergers (which are inflexible), liquidation (which triggers CGT events), or straightforward sale (which may not suit the buyer) — all carry additional cost or complexity.
- Owner-manager exits via buyback. The purchase of own shares route is frequently used where there is no willing third-party buyer, or as part of a management succession. Tighter conditions on who qualifies will require more careful structuring and possibly less tax-efficient outcomes.
- Offshore hold structures. Groups with offshore holding companies distributing to UK individual investors or co-investors need to model the impact of bringing those distributions within the income tax charge. The quantum can be significant — especially in PE structures where distributions are currently categorised as capital.
What the Advisers Are Saying
Macfarlanes describe these as “potentially landmark changes to long-standing features of the UK tax code” and are seeking dialogue with affected businesses. That is measured law firm language for “this is serious”. The Ross Martin commentary on the wider Tax Update 2026 package notes that the distributions consultation is the most far-reaching element of a busy announcement day. EY’s Tax News analysis of the wider package flags that these reforms, combined with the ISA anti-circumvention rules and the timely payments consultation, represent a sustained push to increase income tax yield from capital flows. The direction of travel from the Labour government is consistent: reduce the opportunities to convert income into capital.
The Corporation Tax Rules Are Untouched — For Now
One point of clarity worth stating explicitly: the consultation is confined to the tax treatment of individual and trust shareholders. Corporate shareholders — holding companies, PE funds structured as companies, institutional investors — are not in scope. The corporation tax rules on dividends and group transactions remain unchanged. This limits the direct impact on pure corporate group restructurings, but it does not eliminate the indirect impact: many transactions involve individual shareholders (owner-managers, management teams, co-investors) alongside corporate investors, and the tax analysis for those individuals will change.
Six CFO Actions Before 14 September 2026
1. Audit your pending restructuring pipeline now. If you have a demerger, capital reduction, or subsidiary separation in planning for the next 12-24 months, review it against the consultation proposals. Completing the transaction before any legislation takes effect — likely Finance Bill 2027 at the earliest — may be commercially preferable if the current treatment is material to the deal economics.
2. Review all offshore holding structures. Any group with a non-UK resident close company that makes loans or distributions to UK individual shareholders needs to model the impact of the proposed changes. The proposed extension of the s.455 charge to overseas close companies is not hedged with any de minimis — it applies as drafted to all loans to participators.
3. Reconsider pending share buyback arrangements. If an owner-manager exit via purchase of own shares is in planning, the conditions for capital treatment may become materially stricter. Transactions where the seller retains any ongoing involvement — as a consultant, director, or minor shareholder — should be reviewed against the proposed tighter exit conditions now, while current law still applies.
4. Engage with the consultation. This is not performative. HMRC and Treasury have explicitly flagged that they want to understand commercial practice before deciding whether to proceed. Responses from CFOs, advisers, and business owners will shape the final legislation. The consultation response deadline is 14 September 2026. Macfarlanes and other advisers are actively seeking input from affected businesses. If you have specific structures that would be hit, the time to document the commercial rationale is now.
5. Model the income/capital delta for key shareholders. For any shareholder in a close company who might receive value in the next three years — dividend, buyback, demerger, or loan repayment — model the tax cost under both current law and the proposed changes. The income/capital rate difference is up to 15-20 percentage points. That is not noise; it is a material item in any deal or succession plan.
6. Brief your board and investors. Particularly in PE-backed businesses with individual co-investors, management shareholders, or reinvesting sellers, this consultation is board-level news. The economics of exit structures, earn-out payments, and value return mechanisms may need revisiting. Start that conversation before the headlines force it.
The Wider Context: A Pattern of Narrowing Capital Treatment
This consultation does not sit in isolation. It follows the Finance Act 2025 changes to CGT rates, the restriction of Business Asset Disposal Relief lifetime allowance, and the ongoing HMRC focus on employment status and disguised remuneration. The government’s approach is consistent: wherever individual taxpayers have historically accessed capital treatment on what HMRC characterises as income flows, the rules are being tightened. The distributions consultation is the most ambitious single move in that direction.
For owner-managers, this is the consultation that will directly affect how you take money out of your business — and at what tax cost. For PE-backed CFOs, it will affect the economics of co-investment structures, management incentive plans receiving value via share capital, and any demerger or separation ahead of a portfolio exit. For advisers, it requires a fundamental review of the structuring toolkit that has underpinned transaction tax planning for thirty years.
The consultation is open. The legislation, if it follows, will not be. Act in the window you have.