A dividend is the obvious way money leaves a company. It is rarely the only way. Capital can be returned, shares bought back, a company demerged or wound up, and an owner can simply borrow from the business they control. Each route moves cash to a shareholder, and the UK taxes each one differently.

In June 2026 HMRC opened a consultation on the largest rewrite of these rules since 1965. The offshore chapter took the headlines, and it matters, but the proposals reach purely domestic companies first: frozen capital on shares, a mechanical test for share buybacks, the removal of the capital-reduction demerger, and a replacement for the transactions-in-securities rules. A UK owner-managed company has more riding on this document than most offshore structures do.

This guide explains how the main routes are taxed today, then walks through the consultation chapter by chapter: what is proposed, who it touches, and what an adviser should do before responses close on 14 September.

• The consultation reaches UK-only companies first. The lead proposal freezes the capital on shares at the amount originally subscribed, and the buyback, demerger and anti-avoidance chapters are entirely domestic.
• Scope is limited to income tax. The proposals target shareholders within the charge to income tax, individuals and trusts. Corporate shareholders are not intended to be affected.
• Non-UK company distributions would move into the UK regime, extending the income tax charge to A, B, G and H distributions and stock dividends, with categories C to F still under consideration.
• Loans from non-UK close companies are a question, not a decision. The government is considering whether to introduce a charge at all, and any charge would sit on the UK owner through self-assessment, with four options on the table.
• The purchase-of-own-shares chapter changes advice fastest: the subjective trade benefit test would give way to mechanical conditions with a five-year clawback.
• Nothing here is law. This is an options-stage policy consultation, open until 14 September 2026, and proposals of this kind narrow, widen and sometimes vanish before the statute book.

In everyday language a distribution means a dividend. In tax law it reaches further: dividends, distributions out of assets in respect of shares, transfers of assets or liabilities to shareholders, and certain bonus issues can all fall within the definition in section 1000 of CTA 2010.

The part that matters for this consultation is how the law measures a return of capital. Under s.1000(1)B, a repayment is taxed as a distribution only to the extent it exceeds the capital on the shares, broadly the amount subscribed plus any new consideration. That is a mechanical figure, and the mechanics are precisely the point.

Insert a holding company by a share-for-share exchange and the capital on the new company's shares becomes the market value of the old company at the date of the exchange. A business built on £1 million of subscribed capital and worth £2 million at the exchange can later return £2 million of "capital" with only the excess over that stepped-up figure taxed as a distribution. The extraction is formal, repeatable and well understood, and it is the reason the consultation's second chapter exists.

A close company, broadly a UK-resident company controlled by five or fewer participators or by any number of directors who are participators, pays a charge under s.455 CTA 2010 when it lends to a participator and the loan is still outstanding nine months and a day after the end of the accounting period. The charge runs at the dividend upper rate, currently 33.75%, and is relieved once the loan is repaid, released or written off, with the refund due nine months and a day after the end of the accounting period in which that happens. It is a timing charge rather than a deposit returned on demand, and the delay in the refund is part of its bite. If the loan is written off, the individual is taxed on the write-off broadly as dividend income.

A company that is not UK-resident sits outside this regime entirely. There is no equivalent charge at all on loans from a closely controlled non-UK company to its UK owner, which is the gap the consultation's sixth chapter addresses.

For a UK company, the income tax charge follows the distributions code. For a non-UK company, the charge under s.402 ITTOIA 2005 reaches dividends only, and only dividends that are not "of a capital nature", a line the Court of Appeal examined at length in Beard v HMRC [2025] EWCA Civ 385. Value that arrives as something other than a dividend can fall outside the income tax charge altogether. That asymmetry, rather than any question of where the company pays its own tax, is what the consultation targets.

"Modernising the taxation of distributions and repayments of capital from companies" was published on 23 June 2026 and closes on 14 September 2026. It is an options-stage policy consultation: there is no draft legislation, and several chapters ask whether to act at all. The government's stated aim is consistency, so that two economically identical payments stop producing different tax bills because of how they are routed.

The lead proposal, and an entirely domestic one. Share buybacks and other returns of capital would work from a "frozen" amount of capital carried into any future holding company at the amount subscribed on the original investment, matching the CGT treatment of the deferred base cost. The step-up on a share-for-share exchange would stop working, and with it the standard route of interposing a holding company and later reducing capital to extract value at capital rates. Any UK owner-managed company that has restructured this way, or planned to, is directly in scope.

The capital-reduction demerger route would be removed, pushing demergers onto the statutory reliefs, and the statutory conditions would be loosened in exchange: condition A's requirement that all companies be UK or member-state resident would be dropped, and condition D's restrictions on onward sales, changes of control and winding up would be limited to five years after the demerger. Anyone holding a capital-reduction demerger on the shelf should treat the shelf life as uncertain.

The income tax charge would extend to A, B, G and H distributions as defined in s.1000(1) CTA 2010, plus stock dividends, from non-UK resident companies, aligning them with UK ones. Whether to extend the charge to C to F distributions (redeemable bonus shares and interest on debt with equity characteristics) is still open. The jurisdiction of the company is irrelevant to the proposal: Luxembourg, Jersey, Ireland, the United States or anywhere else, what matters is only that the company is not UK-resident and the shareholder is within the charge to income tax.

Chapter 5 deals with the awkward junction between the income tax charge, the loans-to-participators rules and payments that turn out to be unlawful or unintentional distributions. Three options are on the table: a priority rule, so that an obligation to repay an unlawful distribution does not reduce the income tax charge unless the company has recognised the debt and the s.455 position is actually settled within a set time; putting HMRC's discretionary practice of unwinding unintentional distributions (currently at CTM15295) onto a statutory footing; and allowing income tax already paid on an extraction to be set off against liabilities that arise when the payment is put right.

Chapter 6 asks whether to introduce a charge on loans from non-UK close companies, and the mechanics are constrained by a simple fact: a non-UK company is outside the charge to UK corporation tax, so a s.455-style charge cannot be imposed on the company. Any charge, and any relief on repayment, would fall on the UK-resident individual through their self-assessment return. Four options are on the table:

1. a charge if the loan is outstanding at the 31 January after the end of the tax year in which it was made;
2. a charge if the loan is outstanding after a set period, for example three years;
3. no charge when the loan is made, with tax only on release or write-off;
4. option 3 plus a deemed write-off where the loan is still outstanding after a set period, for example five years.

The spread between those options is wide enough that describing this strand as a settled rule would be wrong. It is a genuine question, and responses will shape the answer.

The chapter most likely to change day-to-day advice. The subjective trade benefit test would be replaced by mechanical conditions: the departing shareholder must have held at least 5% and worked for the company throughout the two years before departure; must give up the entire shareholding and any directorships, with the exit allowed to run over two years; the company must take reasonable steps to keep the price at market value; the holding and working periods stretch to five years where family connections remain; and capital treatment is clawed back if the individual returns as shareholder or director within five years. Retirement and succession planning built on the current clearance practice will need rebuilding around bright lines.

The transactions-in-securities rules would be amended or replaced with a regime intended to be clearer and more principles-based; the design is left open for responses.

The consultation is aimed at shareholders within the charge to income tax: individuals and trustees. It is not intended to affect corporate shareholders directly, and the distribution exemption in Part 9A CTA 2009 is expected to keep them outside. The company's own tax position is largely beside the point; what moves is the shareholder's.

• Map the domestic exposure first. Clients with interposed holding companies, planned buybacks, capital reductions or shelf demergers are the ones whose numbers change most if Chapter 2 and Chapter 7 proceed.
• Review retirement buybacks against the proposed mechanical conditions, especially where family stays in the business or a phased exit is planned.
• List clients with any non-UK company, whatever the jurisdiction, that rely on capital returns or shareholder loans, and model the four loan options rather than assuming one.
• Do not reprice anything yet. Nothing is enacted, and options-stage consultations move. The useful output this month is a client list and a diary note, and, for firms with strong views, a response to distributionsreform@hmrc.gov.uk.

A consultation like this turns one question into thirty: what does s.1000(1)B actually measure, what did Beard decide, which demerger conditions apply today, what would change and when. Each answer needs the current law, clearly separated from the proposal, with the source attached.

GAIN Tax is built for exactly that separation: UK-grounded answers with the primary source one click away, so an adviser can quote what is enacted and flag what is merely floated without mixing the two. We publish our accuracy benchmark openly, and our sources and update policy explains how answers track a moving consultation. If you are comparing tools, our guide to choosing AI tax research software covers the criteria that matter.

The offshore alignment is real, but it is the smaller half of this consultation. The chapters that freeze subscribed capital, mechanise the buyback test, remove the capital-reduction demerger and rewrite the anti-avoidance rules land on ordinary UK owner-managed companies, and they land on transactions advisers arrange every month.

The sensible posture is the boring one: know which clients each chapter touches, respond where the firm has a view, and keep current law and proposal strictly separate in every piece of advice until the statute book says otherwise.

Need to check what the law says today, with the source attached? Start a free trial of GAIN Tax, or book a call for a firm-wide rollout. More guides are on the GAIN Tax blog.

Does this affect UK-only companies? Yes, more than most offshore ones. The lead proposal freezes the capital on shares at the amount originally subscribed, which targets the domestic holding-company route, and the buyback, demerger, transactions-in-securities and unlawful-distribution chapters are all domestic. The non-UK measures are two of the seven proposal chapters.

Is any of this law yet? No. It is an options-stage policy consultation, open until 14 September 2026, with no draft legislation published. Several chapters ask whether to act at all, and proposals of this kind regularly change shape before enactment.

Who would be affected? Shareholders within the charge to income tax: individuals and trustees. The proposals are not intended to affect corporate shareholders directly.

What would change for loans from a non-UK company? Possibly nothing, and possibly a new charge. Because a non-UK company sits outside UK corporation tax, any charge and any repayment relief would fall on the UK-resident individual through self-assessment. Four options are under consideration, ranging from a charge the January after the tax year to no charge until the loan is released or written off, with a deemed write-off variant.

How are loans to participators taxed today? A UK close company pays a s.455 charge at the dividend upper rate, currently 33.75%, on a loan to a participator still outstanding nine months and a day after the end of the accounting period. Relief follows repayment, release or write-off, due nine months and a day after the end of the accounting period in which that occurs. A written-off loan is taxed on the individual broadly as dividend income. Loans from non-UK close companies currently face no equivalent charge.

What happens to purchase-of-own-shares clearances? Under the proposal, the trade benefit test would be replaced by mechanical conditions: 5% held and employment throughout the two years before exit, a full exit of shares and directorships, five-year periods where family connections remain, and clawback if the shareholder returns within five years. Existing clearance-based planning would need retesting against those lines.

Which distributions from non-UK companies would be taxed? The proposal covers A, B, G and H distributions under s.1000(1) CTA 2010, plus stock dividends. Whether to extend the charge to C to F distributions is still under consideration. Today, the income tax charge reaches only dividends that are not of a capital nature, the boundary examined in Beard v HMRC [2025] EWCA Civ 385.