In ICAEW Representation 76/26 (to be published at 2026 Tax Representations | ICAEW in due course), ICAEW has responded to the government’s consultation on proposals to modernise the tax framework dealing with distributions made by companies to individuals and trusts.

As explained in an earlier article, the government’s proposals have implications across a wide range of areas, including corporate restructuring and the loans to participators and purchase of own shares rules. However, it is the government’s proposed changes to the rules applying on a reduction of share capital that are of most concern to ICAEW.  

Reduction of share capital 

The government is concerned that “well-advised taxpayers” can benefit from a tax advantage where companies carry out a reduction or return of share capital, such as a share buyback. This is due to the interaction between the capital gains tax rules and the rules for determining the amount of a distribution, and in particular the treatment of “new consideration” provided for the shares where a new holding company is created (s1000(1)B, Corporation Tax Act (CTA) 2010).  

To address this, the government proposes that share buybacks and other returns of capital will reflect a “frozen” amount of capital on the shares in any future holding companies at the amount subscribed on the original investment, matching the CGT deferment of the original base cost. 

ICAEW is concerned that the government’s proposals will have negative commercial implications for companies, including: 

• limiting the options a company has to remove dissenting shareholders, stifling its growth;
• preventing some companies from paying dividends, impacting on their ability to attract investors; and
• increasing the use of liquidation demergers, at the cost of substantial professional fees for the companies involved.  

Transactions in securities rules 

ICAEW recommends that, rather than amending the capital reduction rules and distribution rules, the government should review the existing transactions in securities (TiS) rules (s682-713, Income Tax Act 2007). ICAEW suggests that the TiS rules could be amended to have a specific anti-avoidance test linked to share exchanges or reconstructions that are followed by a reduction or return of capital.  

The TiS rules are the subject of section eight of the consultation document, where the government proposes to amend or replace the TiS rules with an updated anti-avoidance regime. ICAEW does not support these proposals, arguing that “replacing one set of anti-avoidance provisions with another will only create more uncertainty for taxpayers and agents and more work for HMRC and the Tax Tribunals”. 

Other proposals 

ICAEW has expressed support for the government’s proposals to: 

• Remove the trading requirement from the demergers legislation (section three of the consultation document) and the reforms to the company purchase of own shares rules (section seven). However, unless these routes are made more attractive, businesses will continue to prefer the alternative options. 
• Align the income tax treatment of distributions from non-resident companies to mirror that for a distribution from a UK-resident company (section 4). However, following the decision of the Court of Appeal in Alexander Beard v HMRC [2023] UKUT 73 (TCC), ICAEW considers that aligning s402, Income Tax (Trading and Other Income) Act (ITTOIA) 2005 with s1000, CTA 2010 should not be necessary.
• Improve the treatment of the interaction between loans and the distributions legislation (section 5), but only once the outcome of the consultation on reporting payments to participators is known (see below) and any revisions to legislation have been enacted. 
• Tax loans and temporary extractions from non-resident companies in the same way as for a UK-resident company (section 6). Of the options presented in the consultation document, three and four would be ICAEW’s preferred choices, with the deemed write-off under option four only occurring after the loan has been outstanding for 10 years. 

Wider concerns 

ICAEW has urged the government not to consider the proposals in the consultation in isolation, referring to the following areas where consultation/discussion is still ongoing: 

• the personal tax offshore anti-avoidance provisions (latest position); 
• the reporting of payments between close companies and their participators (latest position); and 
• the taxation of members of US limited liability corporations and other reverse hybrids (latest position). 

In addition, s37, Finance Act 2026 has already made changes to the company reorganisation anti-avoidance rules, and the impact of those changes is not yet known.  

ICAEW believes that businesses require stability and certainty of position, not further administrative changes and complexity.