Can you still split a company without paying tax?

HMRC has consulted on changes that would close the route most owner-managed businesses use to separate. Nothing has been legislated, but the direction is clear enough to be worth understanding now.

If you're in business with other people and one of you wants out, there's a way to split the company in two without selling anything and without anybody paying tax at the point of separation. It's called a capital reduction demerger, and for a lot of owner-managed businesses it's the only route that works.

On 23 June 2026 HMRC published a consultation called Modernising the taxation of distributions and repayments of capital from companies. It closed on 14 September 2026, and HMRC is now analysing the responses. One of the proposals in it would remove the capital reduction demerger route entirely. That isn't reading between the lines. HMRC says so in the consultation document.

What a capital reduction demerger actually does

Take three people who own a property company equally. Call them Alex, Ben and Charlie. The company holds three properties and the three of them have managed it together for years. Charlie now wants out, and he doesn't want a cheque. He wants to take one of the properties and run it himself, while Alex and Ben carry on with the rest.

Done the obvious way, that's expensive. The company sells one property and pays corporation tax on the gain. Then it has to get the cash out to Charlie, which is a further tax charge on top. The alternative is that Alex and Ben find real money to buy him out, and most property companies don't have that sitting around.

A capital reduction demerger does it differently. Charlie ends up owning his property. Alex and Ben keep theirs. Nothing is sold, no cash changes hands, and there's no tax charge on the separation itself.

It's worth being clear that this isn't tax avoidance. The tax is deferred, not removed. When Charlie eventually sells his property and takes the money out, corporation tax and dividend tax become payable at that point. What the demerger does is allow a business to separate without being forced into a sale nobody wanted.

How it works

The mechanics are involved, but the shape of it's straightforward enough.

You put a new holding company on top of the existing company, using a share for share exchange. You then reclassify the shares so that each shareholder holds their own class. The holding company reduces its capital, cancels Charlie's shares, and transfers his part of the business into a new company that he owns.

Charlie gives up shares and receives shares. Everything rolls over.

The reason there's no income tax charge on Charlie is the technical point HMRC is aiming at. When you insert that holding company, the capital attributed to its shares isn't the hundred pounds somebody subscribed years ago. It's the market value of what was transferred in. So there's a large amount of capital available to be repaid, and repayments of capital aren't income.

What HMRC has proposed

HMRC wants to freeze that number.

Under the proposal, the capital on shares in a new holding company would stay at the amount originally subscribed. The hundred pounds, rather than the market value.

Freeze it, and the capital reduction route stops working. More of any payment from a return of capital would be treated as a taxable distribution instead of a capital receipt.

The same proposal reaches further than demergers. It would also affect share buybacks that don't qualify for the existing relief, and the consultation separately proposes rewriting the purchase of own shares rules, replacing the trade benefit test with a mechanical set of conditions. The transactions in securities rules would be scrapped and replaced with something broader and more principles based.

Why not just use the statutory route?

There's already a statutory demerger relief in the legislation, so it's fair to ask why anyone uses anything else.

The answer is that it's narrow. It only works for trading companies, so if you're splitting a property business or an investment business you're outside it entirely. It can't be used where an onward sale is coming. There can't be a change of control afterwards, which catches ordinary family succession planning. And it's fact specific enough that plenty of perfectly commercial splits simply don't fit.

Every one of those cases goes down the capital reduction route instead. Which is exactly the route the proposal would close.

What HMRC is offering in return

To be fair to HMRC, they're aware of this. Their answer is to widen the statutory relief to compensate, and some of what's proposed is genuinely useful.

Investment businesses would be brought within the statutory route, which is a real change. The absolute bans on onward sale and on a change of control would become five year windows rather than permanent restrictions. Several of the conditions would be clarified or dropped altogether.

That change of control point matters more than it sounds. At the moment, ordinary succession planning in a family business can push you outside the statutory route completely. Under the proposal, provided nothing happens for five years afterwards, you would be fine.

The part that has had less attention

Alongside the relaxations, HMRC has proposed removing the automatic right to take a refused clearance to the tribunal.

So the combination is a wider relief that every demerger has to pass through, administered by HMRC, with less recourse if HMRC says no. That's worth thinking about, because the value of a clearance regime depends partly on what happens when you're refused.

What this means in practice

Nothing has changed yet. This is a consultation, not legislation, and HMRC has said it will analyse the responses before deciding whether to proceed. It may consult further on specific reforms. ICAEW and others have raised concerns about the impact on legitimate commercial restructuring, and HMRC specifically asked for input on that point, which suggests they know there's a problem.

So this isn't a reason to rush a restructure through before something that might not happen.

But it's a signal, and the various proposals all point the same way. HMRC is looking to close off routes where capital treatment is achieved outside a framework it controls, and to funnel what remains through clearances.

If you've a split coming, a partner who wants out, or a family business that needs dividing between children who want different things, that's worth knowing now. Not because you need to act this month, but because the route you were planning to use may not be there when you get to it, and the alternative may need five years of nothing happening afterwards in order to work.

That's a planning horizon rather than a deadline, but it's a real one.

If you're thinking about splitting a business or buying a shareholder out, get in touch with us at Saymur and we can talk it through.