Taking money out of your company: two consultations founders should watch after the Budget

Taking value out of a private company has never been simple. Whether a founder is looking to realise value without selling the whole business, buy out a retiring shareholder, return surplus capital, or separate businesses as part of succession planning, the same two questions often dominate the conversation with their advisers.

• Does company law allow the payment?

• Will HMRC tax it as a capital gain, at 24% capital gains tax, or as income, at rates of up to 45%?

Two consultations currently underway could fundamentally reshape how founders take value out of their companies. Published within weeks of each other, they tackle the same underlying question – how and when value can be returned to shareholders – from a tax and a corporate law angle. Taken together, they go to the heart of how founders fund liquidity, plan succession, and manage changes in business ownership.

HMRC: a rewrite of the distributions rules

HMRC's consultation proposes the most significant overhaul of the UK's distributions regime in decades. Behind the technical detail, many of the proposals could have a direct impact on how founders extract value from their businesses, reorganise their ownership structures or plan for succession.

Equity-based extractions would be undergoing the most significant changes. The proposals would narrow or remove a number of routes currently available to secure capital gains tax treatment when shareholders extract value through dividends from non-UK companies or share buybacks.  

Demergers, which are commonly used where shareholders wish to take different parts of a business forward independently or as part of wider succession planning, would also face significant changes. The proposals would restrict the ability to obtain capital treatment for certain non-statutory demergers, potentially making it more difficult to achieve that separation without triggering an income tax charge. 

Debt-based extractions are also in HMRC's sights. The proposals would extend the 'loan to participator' rules to closely held non-UK companies, making it more difficult for UK-resident shareholders to extract liquidity through loans rather than equity. Significantly, the resulting tax charge could fall on the UK-resident individual rather than the overseas company itself. 

Tax is only half the picture. A separate consultation looks at when company law should allow a dividend to be paid.

Company law: a shift from 'distributable reserves' to a solvency test

The government’s consultation on corporate reporting also raises a fundamental question: should the rules on paying dividends change?

Today, a UK company can only pay a dividend out of 'distributable reserves': broadly, profits available for distribution under accounting and company law rules. Working out that figure can require costly technical analysis: accounting standards do not require this figure to appear in company accounts.

The proposal is to move to a solvency-based model: directors would instead certify that paying the dividend will not prevent the company from meeting its debts as they fall due. The drivers are practical – reducing costly reserve calculations and limiting the scope for accounting choices aimed at inflating distributable profits. If the proposal proceeds, it may also facilitate dealing with small balances left in companies before a voluntary striking off, where existing methods (such as undergoing a capital reduction or a formal liquidation) can be disproportionately expensive. 

What this means for you and your business

Crucially, none of these proposals has yet become law.  However, the direction of travel is clear: the way in which business owners extract value could change significantly.

In addition, with the UK Budget now only a day away, these proposals provide important context for considering any further measures that may be announced. While the detail will not be known until the Chancellor speaks, any new announcements will need to be considered alongside the proposals discussed above.

If you are planning dividends, share buybacks, shareholder loans or a business split, now is a good time to review your options with your advisers and consider how these proposals, coupled with any reforms that may be included in the UK Budget, could affect your plans.