TaxDigit

Author: Amir Rafiei

HMRC wants to freeze — and it means that literally. A consultation opened on 23 June 2026 and closing on 14 September 2026 proposes to “freeze” the capital on shares at the amount originally subscribed, a change that would shut down the capital-reduction demerger route entirely and rewrite the rules for a company purchase of its own shares. As chartered certified accountants in Surrey advising owner-managed businesses across the UK, we set out below what is actually being proposed, who it hits, and why the planning window for succession, exit and reorganisation is open now rather than later.

HMRC consultation closing 14 September 2026 would freeze capital on shares, close the capital-reduction demerger route and replace the buyback trade benefit test with a 2-year, 5% holding and working requirement - TaxDigit accountants in Surrey

What Is Being Consulted On — and Why It Matters

The consultation is titled Modernising the taxation of distributions and repayments of capital from companies. HMRC’s starting point is blunt: the rules have remained largely unchanged since corporation tax was introduced in 1965, and the result is that “economically similar payments to a shareholder can be taxed inconsistently”. The proposals are focused on shareholders within the charge to income tax — in other words, owner-managers, family companies and their individual investors. Corporate shareholders are not the target.

The prize at stake is the difference between capital gains tax at up to 24% (with capital losses and Business Asset Disposal Relief potentially in play) and income tax on a dividend, where no such reliefs apply and the effective rate is materially higher. Almost every proposal in the document is an attempt to narrow the circumstances in which value can leave a continuing company at capital rates.

The Freeze: How It Would Work

Today, when a shareholder inserts a new holding company above their trading company under a share-for-share exchange (section 135 TCGA 1992), something odd happens. For CGT the base cost carries over — it stays at the original subscription price. But for the distributions rules in section 1000(1)B CTA 2010, the “new consideration” on the new holding company’s shares is the market value of the trading company at the time it was transferred in, including share premium. A £100 subscription can become £2 million of capital on the shares overnight.

HMRC works the point through with an example. A founder who subscribed £100, built the business to £2 million, inserted a holding company, and later extracted £2 million by reducing capital, would currently pay income tax on £1,000,000 and CGT on £999,950. Under the proposal, the capital on the shares would be “frozen” at the original amount subscribed — £50 on a half-reduction — leaving £1,999,950 chargeable to income tax and a nil capital gain.

The stated aim is symmetry: if CGT defers the base cost, the distributions code should defer the capital too. HMRC expects this to “reduce the significance of the TIS rules” by producing the right answer mechanically, without needing to prove a tax-advantage purpose.

The Casualty: Non-Statutory Demergers

The freeze is not aimed at demergers, but it kills them by collateral damage. Capital-reduction demergers — and liquidation demergers under section 110 of the Insolvency Act 1986 — work precisely because a new holding company is interposed and the enlarged capital is then reduced. Freeze the capital and the mechanism stops working. HMRC accepts this directly: the proposal “would remove the capital reduction route used by corporate businesses to carry out non-statutory demergers, increasing reliance on the statutory route”.

In compensation, the statutory demerger relief in Chapter 5 Part 23 CTA 2010 would be liberalised. The government is considering, among other things:

  • Removing Condition A, so the companies need no longer be UK or EU resident.
  • Widening Condition B to include investment companies — most references to “trade” would be expanded to “activity”.
  • Relaxing Condition D’s prohibition on onward sale and on a change of control, so that each becomes a five-year restriction rather than an absolute bar. HMRC expressly says the change-of-control easement is intended “to allow for better succession planning” in family businesses.
  • Allowing the distributing company to be dissolved after the distribution under Condition K, provided it holds no assets.
  • Removing Conditions C, G, L and M as redundant.

There is a sting. In exchange for the relaxation, the government proposes “to remove the right to apply for automatic appeal by Tribunal should a clearance request be denied”. Wider gateway, but HMRC’s clearance decision becomes much harder to challenge.

Purchase of Own Shares: The Trade Benefit Test Goes

For owner-managed companies buying out a departing shareholder, this is the most consequential section. The subjective “trade benefit test” in Condition A (section 1033(2) CTA 2010), and the Statement of Practice 2/82 practice built around it, would be replaced by “a more mechanical set of requirements”. Under consideration:

  • A minimum 5% holding, held for at least two years — down from the current five — and the shareholder must have worked for the company throughout.
  • A complete exit: all shares surrendered and all directorships resigned. No retaining a token holding for sentimental reasons. The current 25% substantial-reduction test disappears.
  • Multi-tranche buybacks permitted, provided the shareholder fully exits within two years.
  • The company must take reasonable steps to ensure the price does not exceed market value.
  • Where family connections with remaining shareholders or directors persist, the holding and working period extends to five years.
  • A five-year clawback: if the departed shareholder returns as a director or shareholder within five years, capital treatment is withdrawn and income tax is charged in the original year of departure.

Condition B (buybacks to fund an inheritance tax liability, section 1033(3)) is untouched.

Who Should Pay Attention — and Who Should Not Panic

The people who should read this consultation carefully are owner-managers with a succession, exit or reorganisation in contemplation over the next two to three years; family companies where a shareholder wants out but relatives remain; groups planning a demerger to separate trading and property interests; and anyone who has already inserted a holding company and assumed the enlarged capital would be available on a future return of value.

Equally, nobody should reorganise a business purely on the strength of a consultation. There is no draft legislation, no commencement date and no transitional rule in the document. HMRC has said it will “only move forward with these proposals after consultation where doing so is in line with the government’s objectives”. What has changed is the risk profile: the direction of travel is now on the record, and a transaction that is straightforward today may not be in eighteen months.

What Owner-Managed Businesses Should Do Now

  • Bring forward planned buybacks and demergers where the commercial logic already exists. If a shareholder exit or a demerger was going to happen anyway, the case for doing it under the current rules is now materially stronger.
  • Re-test any planned buyback against the proposed conditions. A shareholder who holds less than 5%, has never worked in the business, or intends to keep a few shares would fail the new test but may pass the old one.
  • Review existing holding-company structures. Work out what capital would be treated as frozen and what that would cost on a future return of value.
  • Model the statutory demerger route. If it is going to become the only route, find out now whether your group can satisfy the conditions — and get clearance while the Tribunal appeal right still exists.
  • Respond to the consultation. Responses go to distributionsreform@hmrc.gov.uk by 14 September 2026, and partial responses on the aspects that affect you are expressly welcomed.

Frequently Asked Questions

When does the HMRC distributions consultation close

The consultation opened on 23 June 2026 and runs for 12 weeks, closing on 14 September 2026. Responses go to distributionsreform@hmrc.gov.uk.

Would the freeze on capital apply retrospectively to existing holding companies

The consultation contains no draft legislation, no commencement date and no transitional or grandfathering rule. That is precisely the uncertainty: an existing structure could find its capital frozen for the purposes of a future return of value, so it is worth quantifying the exposure now.

Are capital-reduction demergers still available today

Yes. Nothing has changed in law. The proposal would remove the route, but it is only a proposal at this stage, and it is one HMRC expects to be contentious.

Does this affect corporate shareholders or listed companies

The consultation is focused on shareholders within the charge to income tax and states that the proposals “are not intended to affect corporate shareholders directly”. The purchase of own shares proposals apply to unquoted trading companies.

How TaxDigit Can Help

Reorganisations, buybacks and demergers are exactly the transactions where a good idea and a bad idea look identical until someone reads the legislation. Our Guildford-based team advises owner-managed companies on shareholder exits and group restructuring, models the tax outcome of a buyback under both the current and the proposed conditions, and handles HMRC clearance applications. Our corporation tax and tax advisory and planning services work alongside our statutory accounts team so the transaction and the reporting line up. The consultation document itself is published as Modernising the distributions framework on GOV.UK.

Plan Ahead With TaxDigit

If succession, an exit or a reorganisation is anywhere on your horizon, the sensible response to this consultation is not to wait for the outcome — it is to work out what the current rules give you and whether you want to use them. As premier accountants in Surrey serving clients across the UK, TaxDigit will map the options against both the law as it stands and the law as it may become. Call 01483 230 777, email info@taxdigit.co.uk, or visit our contact page for bespoke advice.

The Capital Goods Scheme — the VAT rule that follows an expensive asset around for years after the invoice is paid — is about to get a great deal smaller. From 29 July 2026, computers and computer equipment leave the scheme altogether, and the threshold for land, buildings and civil engineering works rises from £250,000 to £600,000 excluding VAT. As chartered certified accountants in Surrey advising VAT-registered businesses across the UK, here is what the reform changes, what it leaves untouched, and what you should do about it now.

Capital Goods Scheme reform effective 29 July 2026 - computers removed from the scheme and the land and buildings threshold rises from £250,000 to £600,000 - TaxDigit accountants in Surrey

What Is the Capital Goods Scheme — and Why It Matters

The Capital Goods Scheme (CGS) is a VAT adjustment mechanism for expensive, long-life assets. Rather than fixing your VAT recovery in the quarter you buy the asset, the CGS makes you revisit it across an adjustment period — five intervals for computer equipment and ten for land and buildings — and adjust the VAT you originally claimed if the way you use the asset changes. It bites hardest on partly exempt businesses, property investors and anyone whose taxable-to-exempt use shifts over time. Our earlier guide to the Capital Goods Scheme explains the mechanics in more detail.

What Changes From 29 July 2026

Two changes take effect, given legal force by the Value Added Tax (Amendment) Regulations 2026 (SI 2026/765):

  • Computers and computer equipment leave the scheme. Capital expenditure on computers and items of computer equipment will no longer be a capital item at all. No five-interval adjustment, no CGS register entry, no annual recalculation.
  • The property threshold rises to £600,000. The CGS will only apply to land, buildings and civil engineering works where the capital expenditure is £600,000 or more, exclusive of VAT — up from the long-standing £250,000 limit.

The government’s stated aim is simplification: to reduce the administrative burden on smaller businesses that have been carrying complex, time-consuming CGS calculations for assets that, in cash terms, were never especially significant. In practice, far fewer assets will now need the five or ten-year VAT-recovery adjustment.

The Transitional Rule — Existing Capital Items Keep Running

This is the point most commonly misunderstood, and the one that causes errors. The new rules apply only to expenditure incurred on or after 29 July 2026. Anything already inside the scheme stays inside the scheme and runs its full adjustment period to the end.

So a server bought in 2024 remains a capital item until its five intervals are exhausted, even though computers are no longer in the scheme. A £300,000 office refurbishment completed in 2025 remains a capital item for its full ten intervals, even though it now sits well below the new £600,000 threshold. You do not get to switch off an existing CGS item simply because a new asset of the same kind would fall outside the rules.

Who Benefits — and Who Should Still Pay Attention

The clearest winners are businesses with material IT spend and no property in the scheme: their CGS obligations may disappear entirely for new expenditure. Owner-managed companies and smaller partly exempt businesses that were tripped into the scheme by mid-sized property works will also see meaningful relief, as the £250,000-to-£600,000 band drops out for new spend.

Attention is still needed where a business is partly exempt, where a property project sits close to the £600,000 line, or where an option to tax changes the VAT profile of a building mid-adjustment. And every business with existing capital items must keep its CGS register alive until those items run out.

What VAT-Registered Businesses Should Do Now

  • Review the timing of planned expenditure. For property works and large IT purchases scheduled around July 2026, the date the expenditure is incurred determines the regime that applies for up to ten years. That is a decision worth taking deliberately rather than by accident.
  • Audit your CGS register. Separate items that must keep running under the transitional rule from spend that will fall outside the scheme from 29 July 2026.
  • Drop computers from CGS tracking — prospectively only. New computer expenditure needs no CGS entry. Historic computer capital items still do.
  • Model the £600,000 line on property projects. Phasing, scope and what counts as capital expenditure on the works all affect which side of the threshold a project lands on.
  • Keep your evidence. Simplification does not reduce the standard of record-keeping HMRC expects on the items that remain.

Frequently Asked Questions

Does the Capital Goods Scheme still apply to computers bought before 29 July 2026

Yes. Computer capital items already in the scheme continue through their full five-interval adjustment period. Only expenditure incurred on or after 29 July 2026 falls outside the scheme.

Is the new £600,000 threshold inclusive of VAT

No. The £600,000 threshold for land, buildings and civil engineering works is exclusive of VAT.

What happens to property expenditure of, say, £400,000 incurred after 29 July 2026

It falls below the new threshold and is not a capital item, so no CGS adjustment period applies. The same £400,000 spent before 29 July 2026 would have been caught, and would continue to run.

Do the changes affect input VAT recovery in the quarter of purchase

No. Normal partial exemption and input tax recovery rules still determine your initial claim. The reform only changes whether that claim must be revisited over an adjustment period.

How TaxDigit Can Help

The CGS sits at the intersection of VAT, partial exemption and property — exactly the territory where a small timing decision has a ten-year consequence. Our Guildford-based team reviews CGS registers, models the £600,000 threshold against planned works, and advises on the timing of expenditure either side of 29 July 2026. Our VAT specialists handle the compliance, while our tax advisory and planning service builds the reform into your wider capital expenditure strategy. The legislation itself is available as the Value Added Tax (Amendment) Regulations 2026.

Plan Ahead With TaxDigit

The reform takes effect on 29 July 2026 — which means the planning window is now, not later. If you are budgeting property works or a significant IT investment, a short conversation before you commit the spend can be worth a decade of avoided adjustments. As premier accountants in Surrey serving clients across the UK, TaxDigit will help you get the timing and the treatment right. Call 01483 230 777, email info@taxdigit.co.uk, or visit our contact page for bespoke advice.

22% charge on cash in investment ISAs effective 6 April 2027, with £12,000 Cash ISA limit and £20,000 overall allowance - TaxDigit accountants in Surrey

In the intricate landscape of UK savings taxation, the humble ISA has long been a rare pocket of simplicity: pay in, and your returns grow free of tax. That reputation is about to be tested. As part of the Budget 2025 ISA reforms, HMRC has confirmed a new 22% charge on interest earned on cash held inside non-Cash ISAs, alongside a package of anti-circumvention rules. As accountants in Surrey serving clients across the UK, we are already fielding questions from investors, and here is what you need to know.

What Is Changing — and Why

From 6 April 2027, the annual Cash ISA allowance falls from £20,000 to £12,000 for savers under the age of 65, while those aged 65 and over keep the full £20,000 cash limit. The overall ISA allowance remains £20,000 across all ISA types. The government’s aim is to nudge more people towards Stocks & Shares ISAs and build a stronger retail investment culture.

The obvious workaround would be to open a Stocks & Shares ISA and simply hold cash in it — sidestepping the lower Cash ISA limit entirely. To close that door, HMRC has introduced targeted anti-circumvention rules.

The 22% Charge on Non-Cash ISA Interest

The headline measure is a 22% charge on interest (or the equivalent “alternative finance return”) paid on cash holdings within Stocks & Shares ISAs and Innovative Finance ISAs — the “non-Cash” ISAs. Crucially, this charge applies universally: it does not matter how old you are, which income tax band you fall into, or even whether you are a taxpayer at all. Interest on genuinely invested holdings is unaffected; it is idle cash sitting in an investment ISA that is targeted.

Two Further Anti-Circumvention Rules

The 22% charge does not stand alone. The confirmed rules also prevent transfers from non-Cash ISAs into Cash ISAs for savers under 65, and prevent holding 100% Money Market Funds within a non-Cash ISA — another route through which cash-like returns could otherwise be sheltered. Together, these measures are designed to keep the reduced Cash ISA limit meaningful. HMRC has said further operational detail will follow in its next Tax Free Savings newsletter.

What It Means for Savers and Investors

For most people who use their Stocks & Shares ISA to actually invest, the practical impact is limited. The change bites for those who park significant sums of cash inside an investment ISA — whether waiting to invest, de-risking, or using it as a de facto savings account. From April 2027, that strategy carries a 22% cost on the interest earned. Reviewing where your cash actually sits, and whether a Cash ISA, a General Investment Account or your reduced Cash ISA allowance is the better home, will matter more than ever.

How TaxDigit Can Help

These reforms sit at the intersection of savings, investment and tax planning — exactly where careful advice pays off. Our Guildford-based team helps clients structure their allowances efficiently ahead of the 2027 changes, and our personal tax specialists can review how the new rules interact with your wider position. For high-net-worth individuals and business owners, our tax advisory and planning service builds ISA strategy into a broader, forward-looking plan. You can read the government’s own confirmation in the Tax update 2026 policy paper.

Plan Ahead With TaxDigit

The 22% charge does not take effect until 6 April 2027 — which means there is time to plan, but not time to ignore it. As premier accountants in Surrey serving clients across the UK, TaxDigit will help you make the most of your allowances before the rules change. Call 01483 230 777, email info@taxdigit.co.uk, or visit our contact page for bespoke advice.