UK and International Tax news

Tax Update 2026: Modernising the Distributions Framework

Monday 29th June 2026

The government has published a consultation on the taxation of distributions and repayments of capital from companies to their non-corporate shareholders.

The tax rules applying to transactions between companies and their shareholders, including those establishing the nature, timing, and quantum of distributions, have remained largely unchanged since the introduction of corporation tax in 1965.

The rules are extremely 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. The rules are subject to particular exemptions such as when the extraction is in return for new consideration or repayment of capital.

While the rules generally operate well, the commercial and legal environment in which they apply has undergone significant change. There are some scenarios where they can produce distortions and result in substantively similar payments receiving different tax treatment. In particular, the charge to income tax on dividends from non-UK resident companies developed separately as a charge on income from foreign possessions and is not aligned with the wider charge to income tax on dividends and other distributions from UK resident companies.

Extractions which do not fall within the charge to income tax often result in capital distributions treatment and are subject to CGT instead. This can affect both the amount that is taxable and the tax rate at which it is charged. The result is that economically similar payments to a shareholder can be taxed inconsistently.

The government is now considering how the rules could be modernised to ensure they operate as intended and do not give rise to distortions, without undermining commercial practice. This is intended to produce a cohesive system that taxes equivalent payments in more consistent way.

The proposals are not intended to impact legitimate commercial restructurings, and the government is keen to understand the wider impacts of these proposals on corporate groups, their owners and how they choose to operate.

Many definitional provisions under consideration will apply equally to taxpayers within the charge to corporation tax as to ones within the charge to income tax. The focus of the consultation is on individual shareholders. The proposals are not intended to affect corporate shareholders directly. The general exemption from tax under Part 9A CTA 2009 should ensure this, but the government welcomes responses highlighting unintended consequences.

The consultation covers the following seven areas:

  • Capital reductions
  • Demerger relief rules
  • Income tax treatment of distributions from non-UK resident companies and aligning this with the treatment of dividends and other distributions from UK resident companies
  • Interaction of the distributions regime with the treatment of debt and loans and proposes introducing a priority rule as to when extractions should be charged under the loans to participators regime
  • Loans from non UK resident companies that otherwise would meet the close company criteria and considers introducing rules to address long term extractions
  • Purchase of own share rules
  • Transactions in securities provisions

The consultation runs for 12 weeks from 23 June to 14 September 2026. The government will analyse the consultation process and publish a summary of responses after the consultation closes. It may seek to engage in further consultation on specific reforms.

If you would like more detail on any of the above, please contact Keith Rushen on 0207 486 2378.

 

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