The Chancellor is reported to be considering taxing succession buybacks as income rather than capital gains in the 28 October Budget, building on an HMRC consultation that closed last month.
Chancellor John Healey is considering taxing the handover of family companies to the next generation as income rather than capital gains, according to a report in the Telegraph on Sunday. The move would hit one of the most common succession structures advisers see among business-owning clients.
The newspaper reported that the change would target arrangements in which a company buys back a retiring owner’s shares, often through redeemable shares, out of its profits over time. Such receipts can currently qualify for capital gains treatment, where the higher rate is 24 per cent. Treated as distributions, they would instead be taxed at dividend rates, which run up to 39.35 per cent in 2026-27 according to HMRC. Sales to outside buyers on the open market would still be taxed as capital gains, the Telegraph said.
The plans trace back to an HMRC consultation, “Modernising the distributions framework”, published on 23 June and closed on 14 September. HMRC said the rules defining what counts as a distribution had changed little since 1965 and that the proposals were aimed at individual shareholders rather than corporate ones. It says it is analysing responses.
Among the options is replacing the subjective “trade benefit” test for a company purchase of own shares with mechanical conditions. According to analyses of the consultation by accountancy firms including KPMG and AAB, a seller would broadly need to hold at least 5 per cent of the company for two years, have worked in the business over that period and exit in full to keep capital treatment. A longer five-year period has been floated where the seller keeps family links to the remaining shareholders or directors.
KPMG has already flagged the succession risk. In its analysis of the consultation, the firm noted that family succession often relies on redeemable preference shares after a family or management buyout, allowing a founder to retire gradually. It said the changes “could significantly alter the tax outcome” of these deals and “could therefore place deferred family succession transactions at a disadvantage” compared with outright sales to third parties.
The Telegraph also reported criticism from accountants and the Conservatives, while the Treasury told the paper that tax decisions were for the Chancellor to set out at fiscal events rather than a matter for comment on speculation. The paper said any change was likely to be presented as an anti-avoidance measure and that Healey could still drop the idea.
The proposal would follow Labour’s earlier curbs on inheritance tax relief for family businesses and farms, and lands as the Chancellor looks for revenue ahead of what is expected to be a tight Budget.
For planners advising owner-managers, the issue is the relative cost of a staged family handover against a trade sale. Clients part-way through a phased buyback, or planning one, are likely to want to know whether the treatment they modelled still holds once the Budget detail is published.
The Budget is on 28 October. HMRC has not published draft legislation or a start date for any changes, and accountancy firms reviewing the consultation have said no fixed timetable has been set.
