Most of the planning I do for owner-managed clients comes down to one quiet question. When you finally take money out of the company you built, does it count as income or as capital? The answer can be worth a quarter of the sum. HMRC knows that as well as I do, and on 23 June 2026 it opened a consultation that signals it wants that line drawn far more tightly.
My read is blunt. Nobody's tax bill is going up today, but the routes that made capital treatment possible are being narrowed. If an exit, a buyback or a restructure is anywhere on your horizon, plan it while you still have the full menu.
TL;DR: HMRC's consultation on modernising the taxation of distributions (open 23 June to 14 September 2026) targets close companies and how owners extract value as capital rather than income. It tightens purchase-of-own-shares relief, freezes manufactured capital, and removes the capital-reduction demerger route. Nothing is law yet, but plan any capital event now.
What Is HMRC Actually Proposing?
A rewrite of how value leaving a company gets taxed, aimed at close companies, broadly those controlled by five or fewer participators, which describes nearly every owner-managed business in the country (GOV.UK).
Seven areas are in scope, and the ones that bite are concrete: purchase-of-own-shares relief, "freezing" capital on shares, removal of the capital-reduction demerger route, changes to loans to participators, and a replacement for the transactions-in-securities rules that have sat unchanged since 1960 (GOV.UK). The through-line is a tighter grip on turning income into lower-taxed capital.
This is a consultation, not law; it closes on 14 September 2026 and remains a proposal only (ICAEW). Treat it as direction of travel, not a deadline.
Why Does Capital Versus Income Matter So Much?
Because the gap between the two is the single biggest lever in owner-managed tax. Pull money out as a dividend and, above the £500 allowance, you climb through 10.75%, 35.75% and up to 39.35% at the additional rate for 2026/27 (GOV.UK).
Get the same value out as a capital return on your shares, through a buyback or a solvent liquidation, and you are into capital gains territory at 18% or 24% (GOV.UK), and potentially 18% under Business Asset Disposal Relief on the first £1m of qualifying gains (GOV.UK). The spread has narrowed since BADR was 10%, but on a six-figure sum the difference still runs to tens of thousands. That is the boundary this consultation wants to police.
What's Changing on Buybacks and Demergers?
The mechanics, and this is where the fee is earned. Today a company buying back a departing shareholder's shares can get capital treatment if it passes a soft "benefit of the trade" test. The consultation swaps that for a mechanical rule: the shareholder must have held at least 5% of the equity for two years and must fully exit their shares and directorships (GOV.UK). Some genuine exits that used to qualify will not.
Two more traps sit alongside it. Capital would be "frozen" at its original subscription value, to stop people manufacturing capital through holding-company structures. And the capital-reduction demerger route, a common tool for splitting a business, would disappear, though statutory demerger relief is liberalised in return. If you have leaned on these routes, the ground has moved.
So What Should You Plan For Now?
The audit instinct that runs through my practice matters here more than anywhere: document the genuine commercial reason for a restructuring as you go, not after the fact. The direction of travel is from subjective tests to mechanical ones, and from accepting the label to proving the substance, which rewards contemporaneous evidence and punishes the story assembled in a panic.
When owners come to me about succession or a sale, this is the first area I map, because the tax on the way out dwarfs the year-to-year work. If a capital event sits in your next couple of years, plan it while the routes are open. I have written before about how a director's loan can survive a liquidation and still leave a tax bill, and how share transactions are quietly moving onto you. Same pattern: the plumbing you relied on is being rebuilt.
Frequently Asked Questions
What is a close company, and does this affect mine?
A close company is broadly one controlled by five or fewer participators, or by its directors. That covers the vast majority of owner-managed and family companies, so if you run a private limited company with a handful of shareholders, assume you are in scope.
What is the difference between taking money out as capital and as a dividend?
A dividend is income, taxed at up to 39.35% for 2026/27 above the £500 allowance. A capital return, through a buyback or winding up the company, is taxed as a capital gain at 18% or 24%, and potentially 18% under Business Asset Disposal Relief on the first £1m.
Should I rush a share buyback before the rules change?
No. There is no law yet and no effective date, and reacting to a draft with a hasty transaction usually creates more risk than it saves. Plan any capital event you were already considering, document the commercial rationale, and take advice while the current routes remain open.
If you are weighing up a buyback, a demerger or an exit in the next year or two, let's talk it through. I would rather map the options while the current routes are open than pick up the pieces after they close.