Tax update 2026: Simplifying the tax system or taxing businesses more?

On 23 June, the government published a package of proposals to simplify and modernise the tax system (Tax update 2026: simplification, modernisation and fairness – GOV.UK). At first sight that sounds like good news, and some bits are, but there is also a clear theme running through the proposals. The government wants to tax more business drawings as income rather than capital and it wants to collect the tax on profit extraction sooner.

Income tax rates are usually higher than capital gains tax rates and earlier tax payments help the government’s cashflow, so while any simplification might make some parts of the system easier to operate, it may also mean higher or earlier tax bills for business owners. In this context, simplification also needs to be read as stopping owner managed businesses extracting value on a restructuring, often as part of a family succession event.

There are some useful changes in the package, particularly around succession planning and trust reporting, and there may also be new ways to plan once the detail is clear. For many business owners the immediate point is that taking value out of a company may become harder, but that does not mean planning stops. It means it needs to be thought through carefully. Some current tactics may no longer work, while some business owners may want to accelerate planning before the rules change.

Dividends and extracting value

Dividends have been taxed in much the same way since the 1960s but the government is looking at how owners take money out of their companies, especially where the result is a capital gains tax charge rather than income tax. This is an ongoing theme. Whilst the timing of the announcement was unexpected, the direction of travel has been clear.

The taxation of extracting money from companies and the question of what is income and what is capital dominated my degree, my training as a chartered accountant and chartered tax adviser, and even my thesis for fellowship of the Chartered Institute of Taxation. These are significant proposed changes.

This is not just about ordinary dividends but also share buybacks, company reorganisations and other ways in which value can be moved out of a company. These rules have always been complex, but the proposals suggest a more direct approach and a challenge to some current planning routes around the edges.

“These are not just administrative changes. They could affect how business owners plan.”

The statutory share buyback rules are currently very restrictive. As a result, there are some tax planning workarounds that we use. Those workarounds are being targeted and in return the government proposes to make the statutory rules more generous, but the result is still going to be a more restrictive position for business owners and a need to get to grips with a new rulebook. Costs and taxes are both likely to be higher.

None of this is completely new, as governments have long been concerned about company owners turning income into capital. What feels different now is the pressure on the public finances, the higher tax rates and the clear wish to reduce the perceived tax gap for small and medium sized enterprises.

Demergers are also being targeted. Capital reduction demergers are the common route but the government looks set to prevent that technique and businesses will have to rely on the much more restrictive statutory relief. Higher stamp duty bills are likely. If familiar routes are restricted, some reorganisations could become more expensive and more difficult to complete.

“Business owners should not assume that familiar routes for extracting value or reorganising companies will stay as they are.”

There may still be some good news, as clearer conditions could be better than the current judgement-based tests. The present rules can be uncertain and recent cases have not always helped, so a simpler test could be welcome, provided it is generous enough.

The government is also looking at tighter reporting for payments to shareholders and more regular income tax payments, which could affect business owners who take profits by dividend rather than salary.

Put together, these are not just administrative changes. They could affect how business owners plan, but they may also point towards different ways of structuring transactions once the new rules are settled. We are currently absorbing the implications.

Succession planning and trusts

There are some more helpful proposals in the same package. One would improve capital gains tax relief on gifts of business assets, which matters for lifetime succession planning, especially with inheritance tax relief for business assets now more restrictive.

The issue is most likely to arise where a business has significant goodwill or other intangible value. Put simply, the business may be worth more than the assets you can see on the balance sheet, and that value does not always fit neatly within the current relief rules when shares are passed on during an owner’s lifetime.

If the proposals deal with this properly, they should remove an unnecessary obstacle for families trying to pass on trading businesses in an orderly way. I’d like to take some credit for this change because it is something I have been calling for, but there are many others who have been asking for it as well. It’s overdue.

There is also a welcome suggestion that trust reporting for inheritance tax will be simplified where little or no tax is due. That should reduce cost and irritation for trustees and families.

What should business owners do now?

This is only a consultation package and it is not final law, but it still shows the direction of travel. The government wants fewer opportunities to take company value as capital, less deferral of tax and clearer reporting. That will need careful thought, but careful thought is where good planning starts. It’s also difficult to see a new Labour administration under a different Prime Minister, including a likely new Chancellor, taking a different view.

Business owners should not assume that familiar routes for extracting value or reorganising companies will stay as they are. The sensible step is to review any current plans for share buybacks, reorganisations, succession and dividend extraction. It is better to understand the risk now than to find later that a familiar route has closed, and early review may help identify a better route once the new rules are understood.

Simplification is welcome when it removes unnecessary complexity, but it is less welcome if it simply pushes more transactions into higher tax charges. Either way, business owners should keep a close eye on this. We will be looking closely at the detail and at the planning opportunities that will continue to be available.

Read more insights in our succession and exit planning hub.

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