UK Budget 2026

Our UK Tax team has taken an initial look at some of the key tax announcements of yesterday's Budget.

The UK Budget on 28 October 2026 announced a package of measures intended to provide immediate support for households and businesses while encouraging investment and longer-term growth. The measures include targeted tax increases on bank profits, property income and gambling, reforms to capital allowances, measures aimed at reducing business costs and steps to modernise the tax system. 

Notably, the Budget set out the Government's plans for a new funding model for regional and local government in England, including assigning a share of income tax receipts to mayoral strategic authorities.

There is plenty for businesses, individuals and investors to consider when reviewing their tax and remuneration strategies. The Government has also indicated that there will be a further tax update in 2027, announcing measures to further simplify and modernise the tax and customs system.

Read the key areas of this update:

• Corporate and entrepreneurial tax
• Other business taxes
• Fiscal Devolution Roadmap
• Property taxes update
• Income Tax, National Minimum Wage and personal tax
• Changes to tax administration
• Contact our UK experts if you need advice on how the Budget affects you or your business

Corporate and entrepreneurial tax

New CGT founders’ relief

The Government has announced a new Founders’ Relief, intended to support founders and significant early investors in high-growth, innovative UK companies. From 6 April 2027, qualifying disposals will benefit from a 10% rate of Capital Gains Tax ("CGT") on up to £10 million of lifetime gains per individual.

The £10 million limit will apply per individual, rather than per company. The Government's stated intention is to target individuals who have made a significant, long-term contribution to building innovative and high-growth UK businesses.

Whilst Founders’ Relief does not replace Business Asset Disposal Relief ("BADR"), BADR’s benefit has been significantly reduced in recent Budgets and Founders’ Relief is filling the gap left behind but is intended to be far more targeted than BADR.

The technical consultation published alongside the Budget states that the intention is for qualifying individuals to be founders who:

• have held 25% of the relevant company’s ordinary share capital at the point when the trading activity for which the company was formed commenced, or the preparation for that trade commenced; 
• have held the shares or securities for at least five years before their disposal; and
• have been UK resident under the Statutory Residence Test for at least five continuous tax years before the disposal of the shares.  

The requirement for the individual to have held a significant portion of shares from commencement of trading (or from preparation for trading) is far more targeted at founding shareholders than BADR. BADR, broadly, rewards shareholders with more than a 5% interest in the relevant company. 

Further, the conditions to qualify for Founders’ Relief are intended to include specific company-based conditions that demonstrate the founders established an innovative and high-growth company. The relevant company is intended to be required to meet certain trading requirements and not be carrying out certain excluded trading activities, in a similar manner to the existing rules for the Enterprise Investment Scheme or Enterprise Management Incentives. 

The measure of a ‘high-growth, innovative company’ is proposed to be based on a turnover, headcount and innovation test. 

Importantly, this is not simply a more generous replacement for BADR. Eligibility will depend upon separate conditions relating to the individual, the company and its growth and innovation credentials. The precise design is to be settled: a technical consultation has been launched and closes on 30 November 2026, with legislation then due to be introduced into Finance Bill 2026-27. The devil will be in the detail of the final legislation but it is evident that Founders’ Relief is intended to be a more targeted relief than BADR and will require a greater level of scrutiny for taxpayers as to whether the conditions for claiming the relief are met and therefore greater potential for HMRC to challenge such claims.

What does this mean for business owners?

For qualifying founders, the relief could be extremely valuable. A founder realising a £10 million qualifying gain could potentially access the 10% CGT rate across that amount, subject to the conditions being finalised and met. However, businesses contemplating an exit will need to consider carefully whether the company and shareholder satisfy the new eligibility tests. Where the timing of an exit is flexible, the 6 April 2027 commencement date may become an important transaction-planning consideration.

As a result of the announcement in the Budget founders that could qualify for Founders’ Relief may consider delaying any disposal of shares until after 6 April 2027 when 10% CGT could be available on up to £10 million of any gain.   This may result in a slowdown in share disposals until after 6 April 2027.

Before any disposal, sellers should assess whether Founders’ Relief is available, including in relation to sales due to take place prior to 6 April 2027.  

BADR lifetime allowance reduced from £1 million to £500,000

Alongside the new Founders’ Relief, the Government will reduce the BADR lifetime limit from £1 million to £500,000 for qualifying disposals made on or after 6 April 2027.

The change potentially makes BADR materially less valuable for entrepreneurs who do not qualify for the new Founders’ Relief. In broad terms, only the first £500,000 of an individual's qualifying lifetime gains will fall within the BADR lifetime allowance from that date. This change coupled with the recent increase in the rate of BADR to 18% means that the total potential CGT saving for shareholders that claim BADR is reduced to £30,000 (based on a headline rate for CGT of 24%).

What does this mean for business owners?

Shareholders considering a sale or other disposal should review the timing carefully. There may be a significant distinction between disposals falling before and after 6 April 2027, although transactions should not be accelerated solely for tax purposes without first considering the anti-forestalling/transitional provisions.

The interaction between the £500,000 BADR limit and the new £10 million Founders’ Relief will also be particularly important for founders considering an exit. The new Founders’ Relief is potentially substantially more generous, but its eligibility requirements will be considerably more targeted. 

Enterprise Management Incentives and employee share options 

The Government has announced a package of changes intended to make tax-advantaged employee share options more flexible for growing businesses. The changes will be introduced through the Finance Bill 2026–27 and are expected to take effect from 6 April 2027. 

EMI2 and the expansion of CSOP 

The Company Share Option Plan ("CSOP") will be renamed Enterprise Management Incentives 2 ("EMI2"). The individual limit on EMI2 options will double from £60,000 to £120,000 and the maximum exercise period will increase from 10 to 15 years from 6 April 2027. The existing interaction between the CSOP and Enterprise Management Incentives ("EMI") individual limits will also be removed, allowing an eligible employee to hold up to the full £250,000 EMI limit and the separate £120,000 EMI2 limit concurrently.

Despite its new name, EMI2 is the renamed and expanded CSOP rather than an extension of the existing EMI scheme. It is intended to provide a more generous alternative for growing companies that have moved beyond EMI or do not meet the EMI stricter qualifying conditions.

For scale-ups and other businesses competing for talent, the increased limit and longer exercise period should provide greater flexibility when designing management and employee incentive arrangements. Companies should review whether EMI2 could complement an existing EMI plan or provide an alternative where EMI is unavailable.

The Government has announced other smaller measures to simplify the administration of EMI schemes and to relax certain aspects of the EMI rules to take effect from 6 April 2027 which should assist companies with compliance with the EMI rules, notably:

• The EMI exercise window following disqualifying events will be extended to 180 days from 90 days.
• The exception for EMI qualifying companies controlled by Employee Ownership Trusts (EOTs) will be extended to companies arranging to become controlled by an EOT.
• Shares and share options set aside for employees will be able to be held for 15 years without triggering disguised remuneration rules.

Our Employee Incentives and Share Schemes practice will be able to provide specialist advice on these changes.  

Venture Capital Trust, Enterprise Investment Scheme and Seed Enterprise Investment Scheme

The Government has announced technical changes to the Venture Capital Trust ("VCT"), Enterprise Investment Scheme ("EIS") and Seed Enterprise Investment Scheme ("SEIS") rules to make them easier to use. It has also committed to working with stakeholders to improve HMRC’s Advance Assurance service and fee transparency, alongside clearer guidance and stronger checks on fees that divert investment away from qualifying companies.

The changes will be included in Finance Bill 2026–27, which is expected to be published imminently. Most will apply from 6 April 2027, but an amendment to the withdrawal of VCT tax relief will apply to relevant disposals of shares issued on or after 6 April 2026. The published summary does not explain what the extent of that particular amendment is.

Advance Assurance gives a company HMRC’s view, based on the information supplied, on whether a proposed EIS or SEIS investment is likely to meet the relevant company and share-issue conditions. This can help reassure prospective investors, but it does not guarantee their individual tax relief or remove the need to meet ongoing conditions. The focus on fees is about ensuring that tax-advantaged investment reaches the businesses it is intended to support. More detail is expected in the publication of the Finance Bill 2026-27.

For businesses raising investment, simpler rules and a better Advance Assurance service could make fundraising more predictable. However, the announcement does not promise faster processing or introduce a new turnaround deadline. Once more detail has been published, fund managers and intermediaries may wish to review how their fees affect the money available to investee companies and how those charges are explained to investors.

Modernisation of the taxation of company distributions

The Government has published its response to the consultation on modernising the taxation of distributions and repayments of capital from companies, which ran from 23 June to 14 September 2026. The Government has confirmed that it will proceed with all seven proposals as a package, with changes to their design following stakeholder feedback. Draft legislation will be published for technical consultation in 2027, with the new rules intended to take effect from April 2028.

The reforms are wide-ranging and are intended to provide more consistent tax treatment for economically similar transactions while protecting genuine commercial activity. Among the key changes, the Government intends to:

• restrict the amount that can be treated as a repayment of capital following certain share reorganisations to the capital originally subscribed by shareholders;
• broaden the statutory demerger regime;
• more closely align the Income Tax treatment of certain distributions from non-UK resident companies with those from UK resident companies;
• introduce a charge on certain loans and advances from non-UK resident companies;
• reform the purchase of own shares rules; and
• strengthen the Transactions in Securities anti-avoidance regime. 

The Government has, however, responded to a number of commercial concerns raised during consultation, including confirming that listed companies will not be within the proposed reform to repayments of capital and that the statutory demerger rules will be broadened to facilitate commercially desirable demergers.

For businesses and shareholders, the reforms could therefore be relevant to corporate reorganisations, demergers, shareholder exits, succession planning, share buybacks and certain cross-border structures. Although the detailed legislation is still to come, businesses considering transactions potentially affected by the reforms should factor the April 2028 commencement into their planning and consider whether existing or proposed structures may be affected. There will be a further opportunity to help shape the detailed rules through the 2027 technical consultation, particularly around ensuring that legitimate commercial transactions are not inadvertently caught.

Modernising the administration of corporation tax

The Government has announced a new call for evidence on modernising the administration of Corporation Tax, seeking views on how the system could be made more efficient and easier for businesses to navigate. The review does not consider tax rates, but instead focuses on how businesses meet their Corporation Tax obligations in practice, including the systems and software used for record-keeping, accounts preparation, tax calculations and filing. The call for evidence was published on 28 October 2026 and closes on 20 January 2027.

As part of its wider ambition for a more modern and automated tax system, the Government is exploring opportunities for more integrated information flows, proportionate administrative requirements and better use of data and technology, including artificial intelligence. Importantly, it is asking businesses where the current system creates complexity or administrative burdens, as well as what challenges arise as businesses grow and invest. The responses will be used to help identify priority areas for future reform.

This represents a valuable opportunity for businesses of all sizes to help shape the future administration of Corporation Tax. Businesses should consider engaging with HMRC to highlight what works well under the existing system, alongside areas that create unnecessary cost, duplication or complexity and where greater use of technology could make compliance more efficient. Providing practical feedback now should help ensure that future reforms are proportionate, commercially workable and better aligned with the systems and processes businesses use in practice.

Other business taxes

VAT online marketplace liability ("OMPL") 

The Government has announced that from October 2027 VAT OMPL rules will be extended to UK businesses.

In 2021, the Conservative Government introduced reforms to strengthen VAT compliance in the online marketplace sector ("OMP") by making online marketplaces responsible for accounting for VAT on sales made on their online platforms by overseas businesses.

The extension of the existing legislation will mean that OMPs will be responsible for collecting VAT on sales where goods are in the UK at point of sale. This measure will apply to all UK VAT-registered businesses and any other UK business with annual sales per platform above £90,000. The rules will not apply to business-to-business sales, personal sales or second-hand goods.

The change is designed to tackle tax evasion and support fair competition. The detailed rules regarding compliance, VAT accounting and implementation are still to be confirmed.

VAT treatment of cross-border services

From April 2027, the Government will restrict the VAT reverse charge on services supplied from overseas so that it only applies to recipients that are UK VAT registered businesses. If a recipient of a supply of services from overseas is not VAT registered in the UK, the overseas supplier will be required to charge UK VAT to the UK customer and account for VAT to HMRC.

Under the current rules, certain supplies of overseas services to non-VAT registered UK businesses can result in no VAT being payable. The Government considers that this can give businesses that are not registered for VAT a tax advantage through the use of overseas rather than UK suppliers. The reform is intended to level the playing field for UK suppliers. The measures are intended to simplify the VAT position for businesses below the VAT registration threshold operating through platforms in the gig and sharing economy.

For UK businesses that are not VAT registered the cost of purchasing services from overseas will increase as a result of suppliers being required to charge UK VAT. Overseas suppliers will also face additional compliance requirements, including registering for UK VAT, updating invoicing systems and once registered, keeping records, submitting VAT returns and paying VAT to HMRC.

Legislation to implement this measure will be introduced in Finance Bill 2026-27.

Private hire vehicle operators and VAT

From 2 January 2028, larger private hire vehicle operators will be treated as supplying passenger transport services for VAT purposes. VAT will therefore apply to the full passenger fare. Operators below a turnover threshold will be excluded. The Government will consult on the threshold.

The measure is intended to address inconsistent VAT treatment between larger operators. For affected businesses, it is likely to require changes to pricing, invoicing, driver arrangements and contractual terms. Operators will need to consider whether the additional VAT cost can be absorbed or passed on through higher fares, and businesses that procure private hire services should assess the effect on travel costs and input VAT recovery. The Government’s costing also anticipates that some customers may switch to operators outside the measure and that some drivers may register voluntarily for VAT to recover VAT on their purchases.

Businesses operating in, supplying or investing in the private hire sector should monitor the consultation that will be published shortly and review their operating model before implementation. Particular attention should be given to turnover monitoring, agency and principal arrangements, consumer pricing and the VAT position of drivers. The final scope of this change remains uncertain until the threshold and detailed legislation are confirmed.

Deposit Return Scheme

The Deposit Return Scheme ("DRS") will introduce refundable deposits on single-use drinks containers in England and Northern Ireland when it launches in October 2027. Similar schemes are due to launch in Scotland and Wales, also in October 2027.
 
The Government has confirmed that Finance Bill 2026-27 will include legislation to simplify the administration of the DRS. This includes removing the requirements for individual producers to account for VAT on any unreturned deposits. Instead, this will be done by the Deposit Management Organisation ("DMO").  Whilst the deposit return schemes in Scotland and Wales will be enacted under their devolved powers, as the draft legislation amends the Value Added Tax Act 1994, it will apply to all three schemes.

While the DMO will bear responsibility for VAT on unrefunded deposits, affected businesses will still need to ensure that deposits are correctly coded in their records. As everyone in the drinks supply chain will need to charge the deposit to their buyers when they sell filled drinks containers, affected businesses will include drinks producers, importers, wholesalers and retailers. It may also be prudent for affected businesses to more generally review their readiness for the implementation of deposit return schemes, less than one year before their launch. 

Plastic Packaging Tax

HMRC has today published a summary of responses to a consultation earlier this year on potential certification for mechanically recycled plastic packaging for the purposes of Plastic Packaging Tax ("PPT"). Having considered the responses, the Government has confirmed that it intends to introduce mandatory certification for businesses claiming an exemption from PPT on the basis that its mechanically recycled plastic packaging meets the 30% threshold from 1 April 2030. The Government previously confirmed that the use of a 'mass balance approach' for businesses wishing to account for chemically recycled plastic in its PPT returns from 1 April 2027.

If the majority of respondents to the consultation reflect the wider market, in primarily relying on mechanical recycling (rather than chemical recycling) to meet the tax exemption's recycled content threshold, it should allow businesses, certification providers and wider supply chains sufficient time to prepare for the new requirements.

Businesses relying on the 30% recycled-content exemption from PPT should consider now whether their current evidence and supply-chain arrangements would withstand a mandatory certification regime. In particular, manufacturers and importers should review the traceability of recycled material, any existing certification arrangements and, for imports, the certificates and evidence available from overseas suppliers, while factoring potential certification and audit costs into future supply and pricing decisions.

Further, the Government has published an evaluation of PPT which found that PPT has had a 'moderately positive' impact on both business behaviours and environmental outcomes, although for half of businesses this involved them passing on the cost of the tax to their customers. 

Bank Corporation Tax surcharge

From 1 January 2027, the Government will temporarily increase the Bank Corporation Tax Surcharge from 3% to 6%. The increased rate will apply for 15 months, until 31 March 2028, before returning to 3% from 1 April 2028.

Despite doubling the surcharge, the announcement may come as some relief to the banking sector. There had been speculation ahead of the Budget that the surcharge could return to its previous 8% rate, and UK banking shares rose following confirmation of the 6% rate. Commentary following the announcement suggested that the fixed 15-month period was also significant, allowing the market to view the increase as a temporary cost rather than a permanent change to the tax burden on banks.

The impact could nevertheless extend beyond the banks themselves. A higher tax burden may put pressure on profitability, with industry commentators warning that some of the cost could ultimately be reflected in higher borrowing costs, less attractive savings rates or more selective lending. For businesses, particularly SMEs seeking new finance or refinancing existing facilities, the key commercial question will therefore be whether the temporary tax increase feeds through into the cost and availability of finance.

UK-resident individual members of LLCs and other reverse hybrids

The Government has published its response to the consultation on UK-resident individual members of US limited liability companies ("LLCs") and other "reverse hybrids".

A reverse hybrid is broadly an entity treated as tax-transparent in its home jurisdiction but tax-opaque in the UK. For example, a UK-resident member of a US LLC may pay US tax on a share of the LLC’s profits as they arise and UK tax on distributions. As the two countries are taxing different income, double taxation relief is normally unavailable. The Government recognises that this can produce effective tax rates exceeding 75%.

Therefore, the Government has decided to introduce a new domestic foreign tax credit to reduce this double taxation. It is expected that it will be possible for taxpayers to claim this tax credit from early 2028, following further technical consultation and legislation in a future Finance Bill.

The Government intends to list specific entities (including US LLCs, US S-Corps, Jersey LLCs and French SCIs) and legislate that such entities will be treated as opaque, "for the UK tax purposes of individual members", with distributions from these entities being treated as dividends. The affected individuals will then be able to elect to "credit" overseas tax paid on the profits distributed against their UK tax liability.

It is important to stress that much of the detail of these measures is still to be published. However, the Government's announcement is clearly helpful to UK tax residents investing in certain overseas vehicles.

The Government's announcement follows a controversial Supreme Court decision in 2015. The Supreme Court decided that the particular (Delaware) LLC at issue was tax transparent, which eliminated double taxation for its UK investor members. However, HMRC denied that this decision had broad application and continued to view most US LLCs as tax-opaque, with the result that the LLC is a reverse hybrid and UK investors suffered double taxation.

Of particular interest in the Government’s announcement is its intention to legislate for the tax treatment of specific vehicles. The implication of the Government's announcement is that this treatment will only be relevant for the purposes of the taxation of individual members, not for the entities themselves. However, the categorisation of overseas vehicles is a recurring issue across taxes and can create significant uncertainty for taxpayers trying to rely on incomplete, and potentially outdated, guidance issued by HMRC.

It is hoped that the Government take this opportunity to more clearly detail the treatment of overseas entities for all tax purposes.

Advance Tax Certainty Service

The Advance Tax Certainty Service ("ATCS") aims to offer qualifying businesses undertaking projects with qualifying expenditure of at least £1 billion the opportunity to clarify, in advance, how tax rules will apply to their major investment projects. The taxes covered by the ATCS include Corporation Tax, VAT, Stamp Duty Land Tax, Income Tax, PAYE regulations and the Construction Industry Scheme. Since its launch in July 2026, the threshold to access the ATCS has been £1 billion.

From 4 November 2026, the threshold for qualifying expenditure to access the ATCS will reduce from £1 billion to £300 million. Businesses planning significant UK investment should consider whether projects previously below the threshold for accessing the service could now qualify. Businesses should aim to identify relevant projects early, so that they can approach HMRC with all the necessary information. Obtaining a binding clearance relating to major investment projects can help mitigate tax risk and support investment decisions.

Finance Bill 2026-27 will also amend a penalty provision relating to the ATCS so that a penalty will only be charged where there has been a failure to provide information in relation to a clearance that has been issued. This highlights the importance of making full, thorough clearance applications, to secure the benefits of the service. 

Adult Gaming Centres

The Budget introduces a package of measures affecting adult gaming centres ("AGCs"). Taken together, these measures could increase the cost base for AGC businesses and alter the economics of arrangements between operators and machine suppliers. Operators should factor the April 2027 changes into forecasts and consider reviewing their machine portfolios and property costs. Operators and suppliers should also review profit share, rental and other machine agreements ahead of April 2028 to understand how the proposed changes to MGD liability may affect those arrangements.

Machine Games Duty

From 1 April 2027, the higher rate of Machine Games Duty ("MGD") will increase from 20% to 25% for machines with a maximum stake above £1 or a maximum prize above £100. Rates for lower stake machines will remain unchanged. Higher risk machines of this kind are commonly found in AGCs.

Business rates

Also from 1 April 2027, AGCs in England will cease to qualify for the retail, hospitality and leisure business rates multipliers. This represents a further potential cost increase for operators, although the impact on individual businesses will depend on their particular property portfolio and rateable values.

Changes to MGD liability

From 1 April 2028, responsibility for MGD on supplier-owned machines operated under profit share arrangements will move from the premises operator to the machine supplier. Operators will remain responsible where they own machines outright or use them under fixed rental or lease arrangements and control the takings. Detailed implementation of this change remains subject to consultation.

Devolution to mayors: Fiscal Devolution Roadmap

A new funding model for English regions

The Government has published a Fiscal Devolution Roadmap setting out a new funding model for regional and local government in England. The reforms are intended to replace a significant proportion of central government's grants to local authorities with assigned or locally retained tax revenues, giving mayoral strategic authorities ("MSAs") greater flexibility and a direct financial interest in local economic growth. The principal measures are income tax assignment, increased business rates retention, an Overnight Visitor Levy and new Good Growth Funds. 

For businesses, the overall effect is likely to be greater regional influence over investment in transport, skills, housing and regeneration. This may create opportunities for businesses, developers and investors to engage directly with mayors and strategic authorities on local growth plans and investment priorities. However, because detailed funding allocations and several elements of the new model remain subject to further development, the scale and timing of the commercial opportunities will vary between regions.

Income tax assignment

From April 2028, MSAs will receive an assigned share of income tax generated by residents, initially covering basic rate tax on employment, self-employment and pension income. This is not true fiscal devolution as mayors will not control tax rates or thresholds, but MSAs will have greater flexibility over how revenues are spent and will benefit from growth in their assigned revenues.

While primarily a change to the way public funding is allocated, the measure is being designed to encourage mayors to support employment, earnings and productivity, potentially making regional authorities more active partners for businesses and encouraging significant investment or expansion. Further details, including the share retained and funding arrangements, will be confirmed at the next Spending Review.

Business rates retention

From 2027, mayors will be able to retain a share of business rates income with the Government planning for local and regional government to retain 100% of business rates income before the end of the decade. New Business Rates Retention Zones will also be introduced in nine MSAs, subject to approval and legislation.

The reforms are intended to strengthen local incentives for commercial development and investment. Businesses should therefore monitor local growth plans and retention zones, particularly where projects rely on supporting infrastructure or public investment. The changes do not directly affect individual business rates liabilities.

Overnight Visitor Levy

Strategic authorities will have discretion to introduce an Overnight Visitor Levy on short-term accommodation, calculated as a percentage of the accommodation cost and collected by providers. The measure will be particularly relevant to hotels and other visitor accommodation businesses, especially operators across multiple regions where local approaches may differ. Further detail on the national framework and implementation timetable is awaited.

Good Growth Funds and regional investment

The Government will provide £285 million in 2027–28 to establish and develop Good Growth Funds, comprising £165 million for areas with mayors and £120 million of incubator capital for areas moving towards devolution agreements or strategic authority status. A separate £1.5 billion borrowing facility for MSAs is expected to become operational from April 2028 and may include concessional lending for locally determined projects.

The Funds are intended to align public financial institutions, pension funds and private capital behind regional regeneration and development. Businesses, developers and institutional investors should monitor emerging regional investment strategies, as these may provide new routes to public sector partnership, finance and support for projects that fit local growth priorities. The detailed eligibility criteria, allocation arrangements and lending terms have not yet been provided.

Businesses should identify the strategic authorities relevant to their operations and investment plans, monitor consultations on the visitor levy and business rates retention, and consider early engagement where proposed projects could support regional employment, commercial development or regeneration.

Property taxes update

Sovereign Tax Status Regime

The Government has published a consultation on a proposed new regime for foreign sovereigns investing in the UK. The consultation will close on 20 January 2027, with reforms expected to take effect from 1 January 2029. This follows a previous consultation undertaken in 2022, which sought to restrict sovereign immunity to UK sourced interest income.

The proposed regime would replace existing sovereign immunity from direct taxation with a new statutory sovereign tax status. The new status would apply to foreign sovereign states, heads of state acting in their sovereign capacity, governments and sovereign wealth funds.

Broadly, the reform means that foreign sovereign investors would be subject to UK tax (Corporation Tax, Income Tax and Capital Gains Tax) on certain UK real estate income and gains. This represents a material change for sovereign wealth funds and other sovereign investors with UK property interests. To counterbalance the imposition of this additional tax, the Government intends to give qualifying sovereign investors bespoke access to the UK REIT regime, with provision for a 15% tax rate on income and gains from both controlled and uncontrolled UK real estate investments. Certain activities would remain outside the tax charge, including investment management activities undertaken by sovereign investment offices and gains arising to State-operated Overseas Pension Funds.

Foreign sovereign investors with UK real estate interests should start assessing how the proposed new sovereign tax status regime could affect existing and planned investments. This includes reviewing existing structures, modelling the potential impact on returns and considering whether the proposed REIT treatment could alter the preferred structure for future investment.

Similarly, businesses, developers and fund managers seeking sovereign capital should consider whether the changes could affect the pricing or structuring of future UK projects.

As the proposals remain under consultation until 20 January 2027, affected businesses should also consider whether there are aspects of the new regime on which they wish to engage with the Government.

Business rates

There are a number of important business rates changes to be aware of following the 2026 Budget.
Key changes are:

• From April 2027, business rates relief for pubs, social clubs and all but the largest live music venues in England will increase from 15% to 35%.
• The Small Business Rates Relief thresholds for qualifying retail, hospitality and leisure ("RHL") properties will increase, with 100% relief available up to a rateable value of £18,000 and tapered relief up to £21,000.
• Increases in business rates bills for qualifying RHL properties will be capped at CPI inflation for 2027-28 and 2028-29, subject to specified exceptions.
• Vape shops and Adult Gaming Centres will cease to qualify for certain business rates support from April 2027. See Adult Gaming Centres for more details.
• From April 2027, mayors will receive a share of business rates income and a permanent 20% share of business rates growth in their areas. See Devolution: Fiscal Devolution Roadmap for more details.
• Fees for non-domestic rating appeals will be abolished and the Government intends to introduce a General Anti-Avoidance Rule for business rates following consultation.

The measures should provide further support for businesses in the retail, hospitality and leisure sectors and greater certainty over property costs, particularly for smaller occupiers benefiting from the increased relief thresholds. Conversely, businesses operating vape shops or Adult Gaming Centres will need to factor the withdrawal of certain reliefs into their property costs from April 2027.

The proposed General Anti-Avoidance Rule also indicates increased scrutiny of business rates mitigation arrangements, although its detailed scope remains subject to consultation.

For landlords, occupiers, investors and developers, the changes will be relevant when assessing occupational costs, property acquisitions and investment decisions.

Business rates are devolved to Scotland and Wales, where different regimes and rates apply. Navigating these changes and planning for potential increases will be a critical part of tax plans for businesses.

VAT: zero rating for land sold to social housing providers

The Government will introduce value added tax ("VAT") zero-rating for land sold to qualifying registered providers of social housing from 1 April 2027. This follows a consultation on this measure earlier this year.

No draft legislation has been published yet, but this is a significant change in the VAT treatment of land.  The precise scope of the relief, particularly for local authorities, remains to be seen.

Currently, a qualifying housing association that acquires land for affordable housing may be able to avoid VAT, and potentially additional stamp duty land tax ("SDLT") (or Welsh or Scottish equivalents) on that VAT, by either:

1. acquiring a qualifying interest in partly constructed dwellings after construction has reached "golden brick" stage (broadly, construction above foundation level); or
2. giving the seller a certificate disapplying the seller's "option to tax", where the conditions for disapplication are met.

Achieving "golden brick" can create practical difficulties for qualifying housing associations because development must begin before acquisition which will be an issue where the seller is not a developer.

Disapplying an "option to tax" makes the land sale exempt from VAT rather than zero-rated, potentially restricting VAT recovery or resulting in a VAT clawback for the seller. That can make selling land to housing associations commercially unattractive to sellers.

The proposed change is therefore welcome as it will simplify things for sellers and housing providers. Importantly, the Government intends to target relief on the status of the purchaser rather than the use of the land, which should prevent issues for mixed-use developments.

However, the Government’s response to the consultation refers to registered providers as defined in existing VAT legislation. The existing definition of a "relevant housing association" refers to a "private registered provider of social housing", which does not include a local authority. The Government’s published consultation response does not expressly resolve whether local authority registered providers will qualify for the new VAT treatment.

It is hoped that the Government will explicitly include local authority registered providers of social housing within zero-rating in the draft legislation. Certainly, the Chancellor’s comments indicated as much when he said that:

"To get more council homes built, I’m extending cheaper borrowing for councils, and making all land sold to social housing providers VAT-free."

There are often other entities involved in the provision of affordable housing (such as local authority subsidiary companies). Therefore, it is hoped that the Government ensures that the VAT zero-rating reflects this variety of ways in which affordable housing projects are delivered.

Capital allowances

The 2026 Budget introduced changes to capital allowances rates, increasing them for first year allowances, and reducing the main-rate of writing down allowance.

For expenditure incurred on or after 1 January 2027, the main-rate first year allowance will increase from 40% to 50%, allowing businesses to obtain a larger tax deduction in the year of investment.

From 1 April 2027 (for Corporation Tax) and 6 April 2027 (for Income Tax), the main-rate writing down allowance will reduce from the current rate of 14% to 12%.

While the enhanced first year allowance should improve the immediate tax benefit of qualifying investment, supporting cash flow where expenditure can benefit from the 50% allowance, the ability to use the first-year allowance in practice is quite limited.  Conversely the reduction in writing down allowances will affect more businesses and will result in less tax relief being given to business making capital investment overall.

Businesses planning significant capital expenditure should consider the timing of the investment and model the effect of the changes. In particular, projects spanning 2026 and 2027 may warrant a closer look at when expenditure is incurred and the effect of the lower writing down allowance on existing and future capital allowance pools.

SDLT: amendment to group relief rules

The Government has amended the SDLT group relief rules so that SDLT group relief will now be withdrawn in circumstances where the transferor in an intra-group transaction is wound up and the transferee then leaves the SDLT group.

SDLT group relief is generally withdrawn if the transferor and the transferee of a property cease to be grouped within three years of the transaction. This does not apply where the degrouping occurs because the transferor is wound up.

In practice, this exception was always of limited value because of other anti-avoidance rules. However, the previous gap in the rules could be helpful on an exit where the degrouping had genuinely not been anticipated.

Annual tax on enveloped dwellings: increase in rates

The rates of annual tax on enveloped dwellings ("ATED") will increase by 3.5%, in line with CPI. ATED is an annual tax on dwellings worth more than £500,000 held in companies (or certain other vehicles).

While increases to ATED continue the pattern of previous Budgets, it is worth noting that these charges are, and will continue to be, significant (particularly for higher value dwellings). In practice ATED obligations are easily missed, with resulting liabilities, interest and penalties.

Income tax, National Minimum Wage and personal tax

Income Tax on property

From 6 April 2027, the Government is increasing the rates of income tax on property income in England, Wales and Northern Ireland by 2%. The property basic rate will be 24%, the higher rate will be 44% and the additional rate will be 49%. This is a further 2% increase to the rates announced in the 2025 Budget, which were also due to take effect from 6 April 2027.

The Government reports that this will raise an estimated £575 million per year by 2028/29 and will have no impact on 84% of income taxpayers. However, feedback from landlords suggests that this increased cost will be passed on to tenants in the form of higher rent and the OBR notes that it will, "more likely than not" reduce the supply of rental properties, again resulting in increased rent.
 
The 2% increase announced in the 2025 Budget was rationalised as equivalent to the 2% employer national insurance contributions increase, given that individuals who receive their income from property do not pay national insurance contributions. There was, unsurprisingly, no equivalent national insurance contributions change announced in this Budget, and so the Government is clearly looking for a way to raise income tax receipts without increasing taxes on working people. 

Payments on account system for Income tax self-ssessment

The Government has announced that it intends to modernise the existing Payments on Account ("POA") system for Income Tax Self-Assessment. 

These changes could affect the 3 million individuals who complete self-assessment returns each year and make POA. From April 2029, taxpayers who already make POA will be required to make regular payments during the tax year in which they earn the relevant income.

It is intended that there will be a transition year in 2029 to 2030 to allow for taxpayers to make payments for the previous tax year while also starting to make payments under the new arrangements.
The Government has not announced how the new system will work in terms of the number and timing of payments but has confirmed that the payments will be automated. Taxpayers who are in PAYE employment may choose to pay through PAYE. Further details regarding the changes will be announced in 2027 but no definite timescales have been announced.

Mandatory payrolling of benefits in kind

The Government has delayed and phased the introduction of mandatory payrolling for benefits in kind ("BiKs"). From 6 April 2027, most employers providing medical benefits, company cars, vans or car and van fuel will be required to report those benefits through payroll software using Real Time Information (or RTI, as it is commonly known). Income Tax and Class 1A National Insurance contributions ("NICs") will therefore be calculated and reported in real time, rather than principally through the existing year-end process.

From 6 April 2028, mandatory payrolling will extend to most remaining BiKs. Employers will also be able to exclude benefits provided to eligible globally mobile employees. 

Employers will need to familiarise themselves with the new rules and ensure that benefits information can be gathered accurately in time for payroll processing. HMRC says it expects software upgrade costs to be negligible, but forecasts one-off familiarisation and implementation costs.

Businesses should use the additional implementation period to review their payroll systems, benefit arrangements and internal information flows between payroll, HR, finance and external advisers.

National Minimum Wage and National Living Wage

The Government has announced further increases to the National Minimum Wage ("NMW") and National Living Wage ("NLW") from 1 April 2027.

The new rates will be:

• National Living Wage (workers aged 21 and over): £13.21, up from £12.71
• 18-20 years: £11.27, up from £10.85
• 16-17 years: £8.31, up from £8.00
• Apprentice rate: £8.31, up from £8.00
• Accommodation offset: £11.53, up from £11.10

Each rate will increase by 3.9%, a more modest increase than in April 2026 where rates increased by at least 4.1%. The Government has commented that the increases will benefit 2.3 million workers, with a full-time worker receiving the NLW expected to see an increase of around £910 in gross annual earnings. While the increase is lower in percentage terms than last year's rise, it will add to employment costs for businesses, particularly those with significant numbers of lower-paid workers. Higher wages will also increase associated employment costs, including employer National Insurance contributions ("NICs") where the relevant thresholds are exceeded and, where applicable, growth and skills levy. Employers will therefore need to factor the new rates into their payroll, workforce planning and employment budgets ahead of 1 April 2027.

Exit charges for temporarily migrating trusts

From Budget day, no capital gains tax "exit charge" will apply to trusts that are UK resident temporarily due to one of its trustees moving to the UK, provided that the trust ceases to be UK resident in the same or following year.
 
Capital gains tax "exit charges" can be viewed as a hidden cost of leaving the UK, and so this change will be welcomed by trusts that have only temporarily become UK resident. 

ISA changes

In a reversal to changes announced in the 2025 Budget, the Government has decided not to reduce the cash ISA limit, keeping it at £20,000. The Government will also work with the investment industry with a view to introducing a new ISA incentive for individuals investing in a stocks and shares ISA for the first time.

While the £20,000 limit will be welcomed by individuals as it allows £20,000 of tax-free savings each year, the OBR notes that this will partly be used to shield individuals from the increases to income tax rates on savings and property income, thereby reducing the tax yield received by the Government from these increases. 

Changes to tax administration

Closing the tax gap and modernising the tax system

The Government has announced a number of measures in Budget 2026 aimed at closing the tax gap and modernising the tax system. Some of the measures announced affecting businesses include:

Modernising the correction of errors in tax returns

The Government will legislate in Finance Bill 2026-27 in relation to new requirements for taxpayers to correct returns and document when inaccuracies are identified in documents submitted to HMRC. It is intended that these will take effect from 1 April 2028 and apply prospectively to inaccuracies that occur after this date. 

The legislation will introduce an explicit obligation on taxpayers to take action to correct errors once these are identified. It will also give HMRC a new power to issue a Customer Correction Notice, which will require the taxpayer to check their position and to either correct the inaccuracy or to explain why no correction is needed. 

Reforming civil tax information and inspection powers

The Government will introduce legislation in Finance Bill 2026-27 to take effect from the date of Royal Assent to modernise HMRC’s civil information and inspection powers. The legislation will update the rules for issuing information notices and revise the definition of computer records. These changes are intended to allow HMRC to continue to gain access to the information needed to support compliance work.

Reforming the publication of details of deliberate defaulters 

The Government intends to strengthen the current framework for how HMRC publishes the details of deliberate tax defaulters, introducing changes next year. The reforms are intended to allow HMRC to publish more information about the deliberate non-compliance and details of company officers with personal liability notices.

Proposals to tackle lower value tax debts

The Government announced that, alongside existing measures to recover high-value debts, it will provide HMRC with a new power to enable the direct recovery of lower-value tax debts.

These measures will come into force in July 2029 and will be aimed at individuals, businesses and companies who can afford to pay their tax liabilities but repeatedly fail to do so. In this scenario, HMRC will be able to recover the tax debts through regular instalments directly from the bank accounts of the relevant individuals, businesses or companies.

The Government forecasts that this will raise £320 million by 2031-32 but safeguarding will be important here. The Government states that it will work with stakeholders to develop a Code of Practice which will hopefully set the parameters of how these groups are deemed to be able to afford to pay, and what a "lower-value" tax debt is.

If you would like to speak to our experts about any of these measures and the effects they could have for you or your business, please contact our team below, or your usual DWF contacts.