Business owners could face significantly higher tax bills under proposed HMRC reforms that would see more money taken from private companies taxed as income rather than capital gains, according to tax specialists.
HMRC has launched a consultation on sweeping changes to the taxation of shareholder distributions that could increase the tax payable on certain company withdrawals from a maximum of 24% to as much as 47%.
The proposals, highlighted by audit, tax and business advisory firm Blick Rothenberg, are designed to modernise rules that have remained largely unchanged for decades and align the tax treatment of company distributions more closely with income tax.
Malli Kini, a partner at the firm, said the reforms could have major implications for business owners considering company reorganisations, share buybacks or succession planning.
Under the current rules, where a holding company is inserted above a trading company before value is extracted, a later share buyback or capital reduction is generally taxed as a capital gain.
HMRC is proposing that almost the entire payment should instead be taxed as income, potentially increasing the tax burden substantially for affected shareholders.
Kini warned that owners already considering such transactions should review their plans while the existing rules remain in force, noting that tax changes can sometimes take effect from the date they are announced.
The consultation also proposes changes to company demergers, with commonly used tax-efficient routes potentially being withdrawn in favour of a revised statutory demerger relief that would be easier to access for business restructurings, investments and family succession planning.
The reforms would also provide greater certainty for shareholders leaving private companies through share buybacks.
Under the proposed rules, Point of Sale (POS) relief would operate under a clearer set of conditions, allowing qualifying departing shareholders to continue benefiting from capital gains tax treatment provided they meet ownership, employment and exit requirements.
However, phased exits and partial disposals would still require careful tax planning.
HMRC is also seeking to tighten the taxation of overseas company structures by aligning the treatment of distributions from non-UK companies with domestic rules and introducing charges on certain long-term loans from closely held overseas businesses that currently fall outside the tax net.
One area likely to be welcomed by directors is a proposal to simplify the treatment of invalid dividends and incorrectly executed share buybacks, reducing the risk of the same payment being taxed more than once.
The consultation opened on 23 June 2026 and will run until 14 September 2026, giving businesses, advisers and shareholders an opportunity to comment before any legislation is drafted.
While no immediate changes have taken effect, tax advisers are urging business owners with planned restructurings, capital reductions or shareholder exits to assess how the proposed reforms could affect future tax liabilities.
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