HMRC’s latest consultation on distributions and capital extractions signals that the Government remains focused on how shareholders extract value from their businesses. For entrepreneurs and business owners who have already navigated significant changes affecting exits, profit extraction and succession planning, it’s another reminder that tax planning continues to evolve.

Although the consultation is technical, the underlying message is straightforward. HMRC is considering whether capital gains tax (CGT) treatment should continue to apply to certain transactions where the economic outcome is broadly similar to receiving a dividend. For business owners contemplating a transaction or ownership transition, this is an important reminder to keep structures and plans under regular review.

Political uncertainty and future tax reform

The consultation comes against a backdrop of political change. With Andy Burnham now confirmed as the next Prime Minister following Keir Starmer's resignation, attention is turning to the direction of the new Government's tax agenda.

While Burnham has reiterated Labour's existing pledges not to increase the main rates of income tax, corporation tax, employee National Insurance contributions or VAT, other areas of the tax system could still come under scrutiny. There has been speculation that capital taxes, including CGT and inheritance tax (IHT), could face further reform.

Although there are currently no specific proposals on the table, the combination of a new Prime Minister and HMRC's latest consultation reinforces the importance of proactive planning.

HMRC's proposals on capital gains tax and profit extraction

One of the key areas under review is how shareholders extract value from a continuing business. Many common transactions, including share buybacks, demergers and ownership restructurings, can provide access to capital treatment where a full third-party sale is not taking place. These routes are frequently used to facilitate shareholder retirements, family succession arrangements, management buyouts and other ownership transitions where an external sale is not desirable or achievable.

HMRC is questioning whether capital treatment remains appropriate where the business continues to be owned and influenced by substantially the same parties. If the proposals are taken forward, accessing capital treatment in partial exit and shareholder restructuring scenarios could become more challenging, reinforcing the need for early transaction planning.

Viewed alongside recent changes to CGT and IHT reliefs, the consultation reinforces the Government's focus on transactions that convert what might otherwise be income returns into capital gains. For business owners, this highlights the value of reviewing ownership and exit plans well in advance of any transaction.

Succession planning and future business growth

Not all of the proposals point towards a more restrictive environment. The Government has also indicated a willingness to modernise aspects of the statutory demerger regime, potentially making it easier for businesses to separate activities, facilitate succession plans or prepare for future growth. Continued support for the enterprise investment scheme (EIS) and seed enterprise investment scheme (SEIS) demonstrates an ongoing commitment to encouraging investment and entrepreneurial activity.

Succession planning is therefore moving higher up the agenda, following the recent changes to business property relief which have already prompted many business owners to revisit assumptions around inheritance tax. This latest consultation serves as a reminder that exit planning, ownership succession and profit extraction are increasingly interconnected. For owners who have spent decades building value within their businesses, these issues are becoming part of an ongoing strategic process rather than a one-off exercise.

Steps business owners should take to prepare for change

These developments point to a clear direction of travel. The Government appears increasingly focused on ensuring that profits extracted from owner-managed businesses are taxed consistently, particularly where transactions deliver outcomes that resemble an income distribution.

While tax should never drive commercial decisions, business owners should understand how future reforms could affect both transaction structures and the value ultimately realised. As exit planning, succession and profit extraction become increasingly interconnected, a joined-up approach is likely to be more important than ever. Those who plan early will be best placed to navigate an evolving tax landscape.

If you would like to discuss how these proposals could affect your business, transaction plans or succession strategy, please contact Helen Relf or your usual RSM adviser.

Latest related insights