HMRC consultation on company distributions – what could change for shareholders?

HMRC has recently launched a consultation proposing significant changes to the taxation of company distributions and returns of capital. In simple terms, the focus is on when shareholders are taxed at income rates (for example on dividends or profit extraction) versus capital rates (for example on share sales or certain returns of value). At present, the UK rules can allow different tax outcomes depending on how a transaction is structured, and in some cases whether an overseas or UK company is involved. HMRC is looking to simplify and align these outcomes, but the overall direction is towards more shareholder returns being taxed as income rather than capital. Key proposals include:

• Aligning UK and non-UK distributions so that a wider range of payments from overseas companies are brought into the UK income tax net, reducing some of the flexibility currently seen in cross-border structures.

• Reducing the scope for capital treatment on returns of value, meaning fewer situations where profits can be extracted as capital rather than income.

• Restricting tax-neutral demergers, so that reductions of capital alone would no longer be sufficient and new statutory conditions would need to be met.

• Introducing a new charge on loans from non-UK resident close companies to their participators.

• Merging the loans to participators rules with the distributions code, creating a more unified and potentially stricter regime.

• Tightening the rules for share buybacks, particularly where owner-managers sell shares back to their own companies on retirement.

• Strengthening anti-avoidance provisions, potentially replacing or supplementing the existing Transactions in Securities rules.

From a practical perspective, this could impact how business owners and internationally structured groups approach exits, reorganisations, profit extraction and succession planning. Structures that currently achieve capital treatment in certain circumstances - particularly in cross-border or group settings- may in future be more likely to be treated as income. While the consultation is still at an early stage, it clearly signals a move towards greater alignment and reduced flexibility in distinguishing between income and capital treatment. Given the breadth of the proposals, it may be sensible for business owners, shareholders and groups to start considering whether any existing or planned arrangements could be affected. In particular, transactions involving overseas companies, planned exits, demergers or shareholder reorganisations may benefit from a review under the current rules while they remain in place. We can help review existing structures and planned transactions in light of these proposals and consider whether any steps should be taken now to preserve flexibility or tax efficiency ahead of any future legislative developments.

‍

How can Sanctuary help?

The proposed changes could have significant implications for business owners, shareholders and groups that currently rely on capital treatment for exits, restructurings, demergers or profit extraction. While the consultation remains at an early stage, it signals a clear move towards greater alignment between income and capital taxation and reduced flexibility in certain planning arrangements.

At Sanctuary, we help clients review existing structures, shareholder arrangements and planned transactions in light of potential legislative changes. Whether you are considering an exit, demerger, succession plan or international restructuring, we can help assess the potential impact of these proposals and identify opportunities to preserve flexibility and tax efficiency while current rules remain available.

Visit our Tax & Advisory service page to find more about our tax & residency advisory services, or contact us for a bespoke consultation via the contact form or email us at: hello@sanctuary.ae.