New tax rules proposed for demergers and share buybacks – What the HMRC consultation could mean for you
Rahid Rashid, 28 August 2026
Rahid Rashid, 28 August 2026
HMRC has launched a consultation, Modernising the taxation of distributions and repayments of capital from companies, setting out plans to overhaul how share buybacks, capital reductions and demergers are taxed.
The consultation opened on 23 June 2026 and runs until 14 September 2026. It follows growing concern at HMRC that current rules allow economically similar payments to shareholders to be taxed very differently depending on how a transaction is structured.
Under current rules, a shareholder can sometimes reduce their Income Tax bill on a share buyback or capital reduction by first transferring their shares into a new holding company.
This uplifts the capital recognised on the shares, meaning more of any later payment is taxed as a capital gain rather than as a distribution.
HMRC is proposing to close this down by freezing the capital on the shares of any new holding company at the amount originally subscribed for the shares.
In practice, this would remove much of the tax advantage currently available through this type of restructuring and bring the outcome closer to what would apply had no holding company been used at all.
The statutory demerger rules, which allow a company to split into separate businesses without triggering a tax charge, are also under review.
HMRC accepts that these rules are not currently well used and wants to make them more accessible.
Proposed changes include relaxing the restriction on selling a demerged business or changing control of it, moving from an indefinite restriction to a five-year window.
Several other conditions would be simplified or removed altogether to reduce disputes and provide business owners with greater certainty when planning a demerger.
The Purchase of Own Shares relief, often used when a shareholder leaves an owner-managed business, currently depends on a subjective trade benefit test that has long been a source of disagreement with HMRC. The consultation proposes replacing this with clearer, more mechanical conditions, including minimum shareholding and working periods and a requirement to fully exit the business.
These proposals are still at consultation stage and nothing changes immediately.
However, anyone considering a demerger, a share buyback or a restructuring involving a new holding company should factor this consultation into their planning now, since the eventual rules could significantly affect the tax outcome of a transaction that is not yet complete.
If implemented, the changes could influence how business owners approach succession planning, shareholder exits, business separations and future corporate restructuring projects.
If you are planning a demerger, buyback or corporate restructuring and want to understand how these proposals might affect you, please speak to our Corporate Finance team.
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