The quiet reform to how you take money out of your company

Most of the Budget coverage was about rates. The change that will matter most to a lot of owner-managers was barely mentioned, because it is not a rate at all. The government is reworking the rules that decide when money coming out of your company is taxed as income and when it is taxed as capital. On a sizeable extraction that distinction is worth tens of thousands of pounds, and it is the capital side that is being tightened.

Taking a lump sum out of your company at low capital gains rates is getting harder and more expensive, so if a buyback, demerger or wind-down is on your horizon, the time to model it is now.

This does not raise your dividend rate. It narrows the routes that let you take value out at capital gains rates instead.

Why the income-or-capital line matters

Value leaves a company in one of two ways. As income: salary, which carries income tax and National Insurance, and dividends, taxed at up to 39.35%. Or as capital: proceeds treated as a chargeable gain and taxed under Capital Gains Tax, where the main rate is 24%.

On a large, one-off extraction, capital treatment can be worth a great deal more than income treatment, which is why owners nearing a sale or a wind-down so often reach for a route that delivers capital rather than income. The reform is aimed squarely at those routes, and it lands just as the capital prize is shrinking anyway: Business Asset Disposal Relief, which gives a reduced rate on qualifying gains, has its lifetime limit halved from £1 million to £500,000 from 6 April 2027. Narrower routes, smaller reward, same direction.

What is actually changing

The Budget confirmed the outcome of a consultation called Modernising the distributions framework. The government will go ahead with all seven of its proposals, with some design changes after feedback. Draft legislation is due in 2027, and the changes are intended to take effect from April 2028. So the direction is settled, but the fine print that decides individual cases is not written yet.

The seven areas read like a list of the tools owners use to restructure and extract value:

reductions of capital
demergers, splitting a company or group into separate parts
the income tax treatment of distributions from non-UK resident companies
the interaction between debt, loans and distributions, including loans to the people who own the company
loans from non-UK companies
purchase of own shares, better known as share buybacks
the transactions in securities rules, which can recharacterise a capital transaction as income

If your plan to take money out runs through any of those, it is in scope. The clearest signal of intent is around holding companies: one proposal would fix the amount of capital treated as subscribed on shares in a holding company at the amount originally put in, to stop a familiar move where a new holding company is inserted above the trading company and a capital reduction is later run through it to withdraw funds at capital gains rates. If that describes a structure you have, treat it as something to review, not something to rely on.

Winding up already carries a trap

Owners often assume that closing a solvent company through a members' voluntary liquidation gives clean capital treatment on the reserves. Usually it does. But an existing anti-avoidance rule, the targeted anti-avoidance rule or TAAR, can tax a winding-up distribution as income instead.

It bites, broadly, where you held at least 5% of the company, the company was close (controlled by a small number of people) within the two years before the wind-up, and within two years of the distribution you carry on a similar trade, with obtaining a tax advantage as a main purpose. In plain terms, closing one company to take the cash at capital rates and then starting again in the same line of work can see the whole distribution taxed as a dividend. That rule is not new and not part of this reform, but it is the backdrop: the margin for assuming capital treatment on a wind-down is getting thinner, not wider.

The international angle

Two of the seven areas are explicitly cross-border: distributions from non-UK resident companies, and loans from non-UK companies. The aim is to bring the treatment of money coming from overseas companies more closely into line with UK ones.

This is the part that catches owners with any overseas structure, and it is the work we do day to day. If you hold a non-UK holding company, have an overseas entity in the group, or have moved abroad and still draw value from a company, how a distribution or a loan is characterised can turn on rules that are themselves being redrawn. For an internationally mobile owner, the interaction between where you are resident, where the company is resident, and how the money is routed home is exactly where the tax either arises or does not. Worth mapping properly rather than assuming the current answer still holds in 2028.

What to do now

The rules are not final, but the planning is not premature. If a buyback, capital reduction, demerger or winding up is anywhere near your horizon:

Model it under both the current rules and the likely direction, so a delay or an early move is a decision rather than an accident.
Review any holding company inserted to improve the tax on extraction, which is the area most clearly in the government's sights.
Check loans to participators and overdrawn director loan accounts, which sit inside the same reform.
If there is an overseas company anywhere in the picture, treat the characterisation of distributions and loans as an open question.

One caution on timing: because draft legislation is not due until 2027, nobody can yet tell you exactly where the line will fall, and the changes are meant to apply going forward from April 2028. The sensible move is early analysis, not a rushed transaction done before the detail exists.

If taking value out of your company is on your horizon and you want to understand where you stand under the current rules and the ones coming, book a call and we will work through it with you.

Sources

This article is general commentary on announced and proposed measures, not advice. The distributions reform is subject to a technical consultation and draft legislation in 2027 and may change, and your own position depends on your facts, so take advice before acting.