HMRC Proposes Changes to How Shareholders Are Taxed When Taking Money Out of Companies

HMRC has launched a consultation that could significantly alter how business owners and shareholders are taxed when extracting value from their companies. While the proposals are still under discussion and no immediate changes have been made, the direction of travel is clear: HMRC wants to modernise rules that have remained largely unchanged for decades and reduce opportunities for capital gains tax treatment where it believes income tax should apply.

For many entrepreneurs, family businesses and owner-managed companies, the implications could be substantial.

Malli Kini, Partner, explains:

The rules for how shareholders are taxed when taking money out of a company are decades old. HMRC wants to update them so more payments are taxed as income, at a rate of up to 47%, instead of capital gains, which has a lower rate of up to 24%

Higher tax costs for future shareholder transactions

Currently if a holding company is put on top of a trading company so value can be extracted afterwards, a later buyback of shares or capital reduction is taxed largely as a capital gain rather than as income. The proposed change would tax almost the whole amount as income instead. If shareholders have a transaction like this in mind, it’s worth acting while the current rules still apply.

If implemented, these changes could increase the tax cost of certain restructurings and exit strategies, potentially influencing how business owners approach succession planning, shareholder buyouts and value extraction in the future.

Demerger planning could become more complex

The common routes to split a business without a tax charge, statutory demergers and liquidation demergers, could be closed off by the proposals. In exchange for this, official statutory demerger relief would be made easier to use for investments, businesses and family successions. If a split is on their horizon, owners need to be aware that the tax rules they have planned to rely on could change.

For businesses considering separating divisions, preparing for succession, or restructuring ownership arrangements, this could reshape the options available. While HMRC is proposing a simpler framework in some areas, familiar planning routes may no longer deliver the same outcomes.

Greater certainty for some departing shareholders

A positive change is that if someone is selling shares back to their company as they step away, their eligibility for Point of Sale (POS) relief that lets a departing shareholder be taxed at capital rates would be clearer with a more mechanical set of conditions. Meaning if a shareholder has had a 5%+ holding for two years and has worked in the business, a full exit of shares and any directorship, and does not return to the business within five years (longer where family is involved) they will be eligible. However, any phased or partial exits will still need careful planning.

For business owners planning retirement or succession, greater certainty could make future exit planning easier, although specialist advice will remain essential.

Overseas structures also under review

The tax rules for people who hold shares in, or borrow from, a company based outside the UK could change. HMRC aims to bring the tax on payments from overseas companies in line with UK taxes and introduce a charge that would be payable where there are long-term loans from closely held overseas companies that currently escape tax.

These proposals reflect HMRC’s broader focus on aligning tax treatment across domestic and overseas structures. Individuals and businesses with international arrangements should review how future distributions and financing arrangements may be affected.

A welcome simplification for invalid distributions

Directors or shareholders of private companies where a dividend or buyback was done incorrectly may have some good news. HMRC wants to tidy up the messy tax position that arises when a distribution turns out to be invalid, including the rules that avoid the same amount being taxed twice.

This change could reduce uncertainty and administrative complexity where genuine mistakes have occurred.

Why this matters

Taken together, the proposals represent one of the most significant reviews of shareholder taxation in recent years. While HMRC’s objective is to modernise outdated legislation and simplify certain areas, the practical effect for many business owners could be higher tax liabilities and fewer planning opportunities.

Importantly, taxation changes of this nature can sometimes take effect from the date of announcement rather than the date legislation is passed, making forward planning particularly important for those already considering transactions.

Malli concludes:

There is no immediate change and no need to act hastily, but those with transactions in the pipeline such as buybacks, capital reductions, demergers and reorganisations should review them while today’s rules apply, as taxation changes like this can sometimes take effect from the date they are announced. For people with overseas structures it is worth checking how the proposals would affect future extractions or existing loans

Finally those concerned should make sure they have a say. HMRC’s consultation on this opened 23rd June 2026 and closes 14th September 2026. There is real scope to flag where the proposals would catch ordinary commercial activity.

What you should consider next

• Review any planned share buybacks, capital reductions, demergers or corporate reorganisations
• Assess whether future value extraction strategies could face higher tax costs under the proposed rules
• Consider the impact on succession and exit planning if you are preparing to retire or transfer ownership
• Examine any overseas company structures or shareholder loans that may fall within the proposed changes
• Engage with advisers early to understand potential implications and identify opportunities before any reforms are introduced
• Consider responding to the consultation process if the proposals could affect your business or personal circumstances

While the consultation is still at an early stage, businesses and shareholders should not assume that current planning opportunities will remain available indefinitely.

Would you like to know more?

If you have any questions please get it touch with your usual Blick Rothenberg contact or Malli using the form below.