Budget 2026: Proposed tax changes could affect business restructurings and shareholder exits

Proposed changes to the tax treatment of capital payments to shareholders could have significant implications for business owners planning to restructure their companies or exit a business.

One of the less prominent announcements in Chancellor John Healey’s Budget concerns the tax treatment of capital payments and distributions made by companies to their shareholders.

The distinction matters because capital payments are generally subject to Capital Gains Tax (CGT), while income distributions are subject to Income Tax, potentially at significantly higher rates.

HMRC has long maintained strict rules governing this distinction, some dating back to the mid-1960s. Following a consultation launched in June 2026, the Government is now looking to modernise the system.

What’s Changing?

The Government is proposing to limit the amount that shareholders can receive as capital from a continuing business to the amount they originally subscribed. Any excess would be taxed as a dividend.

This could impact share capital reduction demergers in particular, which are a relatively common and tax-efficient way of separating investment and business assets, for example ahead of a business sale or to move two businesses into separate entities.

According to the Government’s response, “there will continue to be no immediate tax charge on company reconstructions where there are no extractions”.

There are other so-called statutory demerger routes which can be more complex and in certain circumstances carry greater tax exposure than the share capital reduction route.  The Government is proposing that simplification of these rules will be looked at as a counter-balance to still provide a mechanism for separation of businesses where there are genuine commercial reasons eg. an onward sale.

Company purchase of own shares is commonly used in retirement situations or where a shareholder wishes to leave the company following a dispute with other shareholders.  There is a well-established process and set of conditions under which payments to exiting shareholders through a share buyback can qualify for capital treatment.

The Government is also looking at reform of these rules to include the introduction of a minimum 5% holding test, a requirement to surrender all of their shareholding, putting a two-year time limit on phased exits in tranches and potential withdrawal of relief if the exiting shareholder returns to work in the business within five years.

A number of concerns have been raised during the consultation and whilst the Government has committed to making changes, it has proposed that further consultation will be undertaken on how these can be implemented.

This further consultation will take place in 2027 with proposed changes to take effect from April 2028.

For any business considering a restructuring to separate trading or investment activities, or discussing a shareholder exit involving a share buyback, the key consideration is whether those plans should be progressed before April 2028. After that date, it may be harder to achieve the same tax treatment as at present.

These types of transactions can be complex to implement and require tax, accounting and legal input.  Companies considering taking action ahead of these proposed changes should always seek appropriate advice before proceeding with transactions of this nature.