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. The consultation seeks to address two areas. Firstly, there is growing concern at HMRC that current rules arbitrarily allow economically similar payments to shareholders to be taxed very differently depending on how a transaction is structured. Secondly taxpayers are having to use unnecessarily complex structures to implement commercial restructuring and demergers because the more straightforward statutory options are overly restrictive and not available.
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 make the outcome the same as 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, and widening the scope to companies carrying on investment activity rather than just trading.
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 by a company is often used when a shareholder wants to dispose of shares in an owner-managed company. The way this transaction is taxed depends several tests, including a subjective trade benefit test, that has long been a source of disagreement with HMRC. The consultation proposes replacing the subjective test with clearer, more mechanical conditions, including a reduced minimum shareholding and working periods and a requirement to fully exit the business.
The final strand of the consultation is looking at aligning the tax implications of distributions received by UK resident shareholders from both UK and overseas companies.
Under current rules there can be differing treatments between UK and overseas distributions and it can be difficult to identify how some amounts received from overseas companies should be taxed in the UK.
The consultation is looking at a few options to align these rules.
These proposals are still at consultation stage and nothing changes immediately. It is possible that the outcome of the consultation and any proposed changes are announced when the Budget is delivered on 28 October 2026, although perhaps it is more likely that this will move forward in 2027.Anyone considering a demerger, a share buyback or a corporate restructuring should factor this consultation into their planning now, especially as the eventual rules could significantly affect the tax outcome of a transaction that is not yet complete when the rules are changed.
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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