Company distributions reform from April 2028: what changes

Budget 2026 confirms a wide reform of how companies’ payments to their individual shareholders are taxed, taking effect from April 2028. The aim is to stop well-advised owners taking profits out of a continuing company at capital gains rates through restructuring, while protecting genuine exits, demergers and family succession. For advisers to owner-managed businesses it is the most important structural change in the Budget, even though nothing changes for ordinary dividends.

What was announced

The Chancellor told the Commons: “I am changing outdated rules so that people taking profits out of their companies are taxed consistently and I will protect the treatment of genuine commercial transactions and families passing their businesses down to the next generation.”

The Treasury’s policy explainer says the rules “have remained largely unchanged since 1965”. Following consultation, the government is proceeding with all seven proposals as a package, with some design changes. HMRC will contact stakeholders in early 2027, draft legislation will be published for technical consultation in 2027, and the changes will apply from April 2028. The government says they will apply prospectively and will not require companies to analyse their historic share capital.

The example the government uses

The explainer gives this illustration. Olivia and Tom each own a similar business and want to take out £200,000 of accumulated profits. Olivia pays herself a dividend and pays dividend tax. Tom was advised to insert a new holding company, swapping his shares for shares in it. The holding company then buys back some of his shares for £200,000, so he pays capital gains tax instead of dividend tax. The government says Tom is not avoiding tax, but the planning gives him a lower rate that most people cannot access. If Tom genuinely sold the business, he would still pay CGT after the reforms.

The seven changes

1. Repayments of capital after reorganisations. Following a share reorganisation, the amount that can be treated as a repayment of capital on a buyback or reduction of capital will be limited to the capital originally subscribed by shareholders. In effect, capital is frozen at the original investment instead of stepping up when a new holding company issues shares. Listed companies are excluded, and the change will only apply to reorganisations after the legislation takes effect.

2. Wider statutory demerger relief. Because the first change limits capital reduction demergers, the statutory demerger rules will be modernised to apply in a much broader set of circumstances. Demergers ahead of some onward sales, such as selling a division of a trading group to a third party, may qualify. The government will keep the “all or substantially all” test, consider relaxing the 75% subsidiary condition, review the clearance process and consider replacing the chargeable payments rules with something simpler.

3. Distributions from non-UK companies. Certain distributions from non-UK resident companies will be brought into the charge to income tax so they are taxed like equivalent UK payments, including a charge on stock dividends. Genuine fund investment returns and asset managers’ co-investment will keep capital treatment where they have it now.

4. Debts, loans and distributions. Priority rules will make clear whether a charge falls under the loans to participators rules or the distributions rules, which matters for unlawful dividends. The government may extend this to capital distributions such as void share buybacks.

5. Loans from overseas companies. A temporary charge, modelled on the loans to participators rules but paid by the individual, will apply to loans or advances from non-UK companies that would be close companies if UK resident, with a charge on release or write-off. It may be limited to participators with material interests and to loans not made for the company’s commercial purposes.

6. Purchase of own shares relief. The subjective “trade benefit” test will be replaced with mechanical conditions, including a 5% minimum shareholding that is still under discussion. The requirement to have been an employee for the two years before the sale will be relaxed, and the government will consider letting a departing founder act as a consultant for a period. Company-funded exits will be able to be completed in stages, which helps family succession where cash or reserves are limited.

7. Transactions in securities. The transactions in securities rules will be replaced with a clearer, principles-based anti-avoidance regime, which may be brought into self assessment.

What is not changing

The explainer is clear that:

• dividend and CGT rates are not changing
• ordinary dividends will still be taxed as dividend income
• ordinary sales of shares to another person or business will still be subject to CGT
• listed company shareholdings are not affected by the reduction of capital changes
• parents can still gift or sell shares to their children under the existing rules, with gift holdover relief where it applies

What it means for accountants

Review planned reorganisations and buybacks. Clients considering a share-for-share exchange into a holding company followed by a buyback, or a capital reduction, should be reviewed against the 2028 rules. Transactions completed before the new rules start remain under today’s law, but the transactions in securities rules still apply now.

Retirements and exits through buybacks will change. The new purchase of own shares conditions are mechanical, which should give more certainty, but a 5% threshold and staged payment rules will need to be designed into shareholder agreements. Clients with employee share scheme or EIS shareholders should follow the consultation, as the government has said it does not intend to undermine those schemes.

Overseas structures need a check. UK resident individuals who receive stock dividends, non-dividend distributions or loans from overseas companies they control are directly affected.

Take part in the 2027 technical consultation. The government has said it will test whether the rules protect genuine family business succession. Practices with family company clients are well placed to supply examples.

The reforms sit alongside the cut in the BADR lifetime limit and the new Founders’ Relief. For background see our guides to holding company structures, close company rules and dividend income tax.

Frequently asked questions

When does the distributions reform take effect?

From April 2028. Draft legislation will be published for technical consultation in 2027, and the government says the changes will apply prospectively.

Are dividend tax rates changing?

No. The reform does not change dividend or capital gains tax rates, and ordinary dividends will continue to be taxed as dividend income.

Will the reform stop family businesses passing to the next generation?

The government says no. Gifts and sales of shares to children under the existing rules are not affected, and the purchase of own shares changes are designed to allow company-funded exits in stages. The technical consultation will test whether further adjustments are needed.

Does the reform affect selling my company to a buyer?

The government says gains on ordinary sales of shares to another person or business will remain subject to capital gains tax. The changes are aimed at extracting profits from a continuing company at capital rates.