Why business owners should consider restructuring now

If you are considering restructuring your business, now could be the time to do it.

HMRC has recently published its Tax update 2026: simplification, modernisation and fairness, setting out a broad package of consultations on proposed changes to the UK tax system. While many of the announcements are administrative in nature, one consultation in particular could have a significant impact on companies, shareholders and business owners considering restructuring, succession planning or a future sale.

The consultation, Modernising the taxation of distributions and repayments of capital from companies, looks at long-standing tax rules that have remained largely unchanged since the introduction of Corporation Tax in 1965, over 60 years ago. HMRC is seeking views on whether the current framework remains fit for purpose, particularly where payments to individual shareholders can be treated differently depending on whether they are categorised as income or capital.

What could change, and why it matters for business owners

One of the most important areas under review is the extent to which amounts paid by a company in respect of its shares can be regarded as a receipt of capital in the hands of the recipient shareholder. This could have a significant impact on company demergers, in particular.

At present, a common way to separate different parts of a business is through a ‘capital reduction demerger’, which can often be achieved tax efficiently because of the reconstruction reliefs which are available. If HMRC’s proposals are introduced in their current form, this route may no longer have the same favourable tax outcomes.

There are alternatives to ‘capital reduction demergers’, such as ‘statutory demergers’, although the circumstances in which ‘statutory demergers’ can be implemented are relatively limited. Recognising this, the government is reviewing the statutory demerger rules to ensure that they will not prevent legitimate corporate reconstructions.

The statutory demerger rules may be widened so they can apply in more circumstances. In particular, they may in future allow investment businesses to undertake a statutory demerger. However, HMRC has indicated that relief may not be available where a demerger is used to facilitate an onward sale within five years. This could restrict the flexibility currently available to businesses looking to reorganise ahead of a potential sale, investment or succession event.

HMRC is also consulting on changes to the company purchase of own shares rules and the transactions in securities rules. These regimes can affect whether shareholders are taxed on a capital basis or whether receipts are taxed as income. For owner-managed businesses, this could be particularly relevant where shareholders anticipate exiting, retiring or reorganising their interests.

HMRC states that the proposed changes are not intended to impact legitimate commercial restructurings, and that shareholders undertaking demergers or share restructurings for legitimate business purposes should not be adversely affected by the proposals. However, until the final rules are confirmed, there is uncertainty around how HMRC will define and apply these principles in practice.

Timescales for changes to apply

The consultation closes in September 2026, and the earliest that any changes are likely to be introduced is the 2026 Autumn Budget. Given the uncertainty around the future tax landscape in relation to corporate transactions, if a restructuring, demerger, purchase of own shares or pre-sale reorganisation is contemplated, it may be sensible to consider proceeding with it sooner rather than later.

Key points

• Capital reduction demergers (and liquidation demergers) may no longer be tax-efficient means of partitioning businesses.
• Statutory demerger relief could be expanded, but may nevertheless continue to have limitations.
• Shareholder exits, purchases of own shares and capital repayments may be subject to tighter rules.
• Businesses considering any form of restructuring should seek advice now.

Need help?

If you're considering restructuring your business, planning succession or preparing for a future sale, now is a good time to review your options. Although the proposals are still under consultation, acting early could preserve opportunities that may not be available once new rules are introduced.

Get in touch with your usual Larking Gowen contact or send an enquiry to our team:

• 0330 024 0888
• Submit an enquiry

Vicky Craske | Manager in our Business Tax Advisory team | Norwich, Norfolk

Andrew Robinson | Partner in our Business Tax Advisory team | Norwich, Norfolk