Government proceeds with wide-ranging reform of the UK distributions framework

The government will proceed with all seven proposals to reform the UK distributions rules as a cohesive package, HMRC confirmed in its consultation response published alongside the autumn Budget on 28 October. The response to the wide-ranging consultation on modernising the distributions rules included some changes to the policy designs as a result of stakeholder feedback. 

HMRC has confirmed that the changes will not apply retrospectively. Following concerns about the impact on corporation tax payers, companies will not be required to analyse their historic capital. 

Reductions of capital 

HMRC will limit the amount treated as a repayment of capital following a share reorganisation to the capital originally subscribed by shareholders. Any excess returned to a shareholder will be treated as a distribution). Following stakeholder feedback, listed companies will be excluded, reflecting their complex capital structures and greater regulation. 

HMRC acknowledges feedback that the proposed freezing rule on capital contributions would directly affect a widely used demerger route: interposing a new holding company followed by a capital reduction. Commercial demergers will be protected through broader statutory relief for demergers, rather than solely through anti-avoidance rules.

Demerger proposals

The government will modernise and widen statutory demerger relief, with some concessions to its original proposals. 

Demergers ahead of onward sales will be permitted in certain circumstances, such as sales of trading-group divisions to third parties. The government has also dropped its proposal to require "all" of the distributing company's interest to be conferred as part of the demerger, retaining the existing "all or substantially all" wording in the statutory conditions. As part of the further technical consultation, the government will also consider the impact of relaxing the 75% subsidiary condition to include 51% subsidiaries. 

Following feedback that the chargeable payments provisions posed a substantial barrier to the use of the statutory demerger regime, the government said it would develop a simpler, more proportionate replacement. 

Rather than removing the right to have a clearance application reviewed by the First-tier Tribunal where clearance is denied, the government will review that right alongside other statutory clearance procedures, with safeguards considered during the technical consultation.

Distributions from non-UK resident companies

The government will proceed with the proposal to apply the existing distribution rules to distributions from non-UK resident companies so that they are taxed (to income) in the same way as those from UK-resident companies. The government acknowledges that this is a complex issue that will require substantive reform and does not intend for these reforms to undermine the UK's competitiveness. 

In welcome news for private capital, the government has confirmed that genuine investment returns in fund structures and asset managers’ co-investment will retain capital treatment where currently available, with legislative details still to be developed.

Overseas company loans and temporary extractions

The government will introduce a charge on loans or advances from non-UK companies, including debts incurred, and a charge on the release or write-off of the debt. The temporary loan charge will be  repayable when the loan is repaid, released or written off. Unlike the charge on loans from UK-resident companies, it will fall on the individual rather than the company making the loan, which will be outside the scope of UK tax. 

Following stakeholder feedback, the government will consider limiting the temporary charge to borrowers with material interests and to loans not made for the company’s commercial business purposes. The government will also consider whether the interests of partners in a partnership will be excluded when calculating whether a person has a material interest in a company.

Debt, loan and distributions legislation interaction

Reform of the interaction between the rules on distributions and loans to participators will proceed, so that extractions of value in favour of shareholders are clearly charged under one set of rules. No final decision was confirmed as to which route of reform will be followed, but this will be developed through further consultation.

The government said it would consider extending the reform to capital distributions, after stakeholders during consultation cited examples such as void share buybacks. 

Purchase of own shares relief

The proposal to replace the purchase of own shares relief with a more mechanical set of requirements will proceed but the requirement for employment throughout the two years immediately before disposal will be relaxed, while the requirement for a minimum 5% shareholding threshold will remain subject to further engagement. 

The government will also further consider the proposed restriction on an individual returning to employment as a shareholder following disposal to enable some consultancy support after exit. It will also explore safeguards for employee share schemes and the Enterprise Investment Scheme and Seed Enterprise Investment Scheme so that the reforms do not undermine the viability or attractiveness of such schemes.

Anti-avoidance and transactions in securities

The government will proceed with the reform of the Transactions in Securities rules with detailed proposals to follow and a proposal to bring the regime into self-assessment as part of the reform. 

Next steps

HMRC will resume stakeholder discussions in early 2027, followed by a technical consultation, including draft legislation, later in 2027. The government intends the changes to apply prospectively from April 2028, with guidance published before commencement. Policy development will be coordinated with related work, including the consultation on limited liability companies.

Osborne Clarke comment

The government’s engagement with stakeholders and concessions on some of its original proposals are welcome. However, with all seven proposals being taken forward, the reforms remain wide-ranging and will affect many commercial restructurings, particularly those involving owner-managed businesses. 

With further technical consultation due next year, the April 2028 implementation date is ambitious given the breadth of the reforms. The government’s confirmation that the changes will neither apply retrospectively nor require companies to analyse their historic capital is, however, welcome.

If you would like to discuss any aspect of the proposals further, please get in touch with one of the contacts below.