Key Takeaways From the UK Budget 2026

John Healey delivered his first Budget as Chancellor of the Exchequer on 28 October 2026, which was also the first Budget of the new Burnham government, billed as delivering breathing space alongside big structural changes for the future.

While the overall tax landscape remains broadly unchanged, as expected, this Budget has introduced new measures and progressed existing tax policy proposals in a number of areas, which we have summarised below. Businesses likely to be affected should consider these proposals carefully to assess the potential impact on their operations and long-term strategy.

Tax Rates and Payments

Banking Surcharge

The corporation tax surcharge on banking companies will be temporarily increased to 6% for 15 months. The changes will apply from 1 January 2027 to 31 March 2028.

Income Tax Rates

From 6 April 2027, savings income rates will rise to 24%, 44%, and 49%. Tax rates on property income will be set at the same levels, with the increase to 24% applying to property income distributions from REITs.

HM Treasury has also indicated that withholding tax on UK source yearly interest will be applied at the savings basic rate (i.e., 24% given the above changes) from April 2027, which would increase the rate of withholding on interest paid to lenders not entitled to an exemption or treaty relief.

Capital Allowances

The main rate first-year allowance will rise from 40% to 50% for expenditure from 1 January 2027, but the main writing-down allowance will fall from 14% to 12% from April 2027.

Income Tax Payments

From April 2029, Self Assessment taxpayers making payments on account will move to more regular in-year payments (potentially monthly payments). Payments will be automated, with eligible taxpayers able to choose to pay through PAYE. This will affect the cash flow of all self-employed partners, including members of fund management LLPs, and of carried interest holders. Detailed design remains open, including the practical treatment of volatile carried interest receipts.

International Investment

UK-Resident Members of LLCs and Other Reverse Hybrids

Following a consultation over the summer, the government has confirmed that it will address the double taxation that can arise for UK tax-resident individuals who are members of US limited liability companies (LLCs) and other “reverse hybrid” non-UK entities (broadly, entities which are treated as transparent in their home jurisdiction but as opaque for UK tax purposes).

The government will not proceed with its recent proposal to treat these entities as transparent. Instead, it is minded to introduce a new form of credit relief. Specified entities would be treated as opaque for UK tax purposes, with distributions taxed at dividend rates. However, members of the specified entities could elect for foreign tax paid personally on the entity’s profits to be credited against their UK tax on the relevant dividends. The opaque classification itself would not be elective.

The mechanism is expected to be available from early 2028, following further consultation. The treatment of such entities and relevant UK taxpayers in relation to earlier periods (and the resolution of ongoing disputes relating to the same) remains under consideration. These proposed changes are particularly relevant to the funds industry given the prevalence of US LLCs in US fund structures (including where executives hold carry, co-investment, or incentives through US LLCs).

Sovereign Investors

The government has proposed replacing the current non-statutory “sovereign immunity” from UK direct taxes with a statutory sovereign tax status from 1 January 2029. Status would be available to foreign states (including each constituent territory of a federal state), governments, central banks, sovereign wealth funds, certain wholly owned state entities, and a new category of state-operated overseas pension funds (SOPFs). All sovereigns, including those currently relying on immunity, must apply formally to HMRC.

Sovereigns would become taxable on income from UK land, gains on direct and indirect disposals of UK land, and UK trading income. UK-source interest, dividends from UK companies (other than REITs), and qualifying investment office activities would remain exempt, and SOPFs would be exempt from tax on all chargeable gains (including real estate-related gains).

Sovereign Tax Status: Funds and REITs

Sovereigns would remain qualifying institutional investors (QIIs) for the QAHC, LTAF, non-resident capital gains (collective investment vehicle), and QII substantial shareholdings exemption (SSE) regimes. However, other than SOPFs, they would lose the SSE on disposals of interests in UK property-rich vehicles and could no longer invest in exempt unauthorised unit trusts.

As part of a new regime encouraging sovereigns to invest in REITs through UK-resident “sovereign REIT holding companies”, sovereigns would not be exempt from being treated as holders of excessive rights (HoERs). The new “sovereign REIT holding company” regime is expressed as allowing a sovereign to control or wholly own a UK REIT. These entities must be wholly owned by a person with sovereign tax status, used only to invest in REITs, and notified to HMRC. They would pay 15% corporation tax on gross property income distributions, with no deductions, but would not trigger the REIT’s HoERs charge.

Sovereign Tax Status: Transition

Assets newly brought within the charge to chargeable gains would be rebased to market value on 1 January 2029. A time-limited SDLT relief and targeted relief from the corporate debt and derivatives anti-avoidance rules are also proposed to help restructure existing UK real estate holdings.

The proposed approach resembles the Treasury’s 2022 proposals to target the exemption from tax enjoyed by sovereigns on UK-source interest income. Although this new approach is more generous in some respects, many sovereigns, particularly those holding UK real estate directly or through funds, will still find it unwelcome. The consultation closes on 20 January 2027, followed by technical consultation on draft legislation.

Distributions and Returns of Capital

The government will proceed with its package of reforms to the taxation of distributions and repayments of capital, with changes to apply from April 2028.

The reforms will extend the distribution rules to certain overseas company payments, restrict the amount that can be treated as a repayment of capital after reorganisations, introduce a temporary charge on overseas company loans to UK resident participators, and amend share buyback and transactions in securities rules. Broader statutory demerger relief would accompany restrictions on existing capital reduction routes.

These changes are of particular concern to the private capital industry, as fund structures commonly use non-UK holding companies and return capital proceeds by way of share buybacks taxable at capital gains tax rates rather than dividend rates. Helpfully, the government has indicated that returns on asset managers’ co-investment, as well as genuine investment returns in fund structures, will continue to receive capital treatment where that is available under the current rules. How this is achieved in the legislation will be critical for fund managers, executives, and investors. Draft legislation is expected for consultation in 2027.

UK Businesses

Founder Incentives

A new Founders’ Relief will apply a 10% capital gains tax (CGT) rate to qualifying disposals from 6 April 2027. The relief will be subject to a £10 million lifetime limit, which will be reduced by the value of any disposals for which Business Asset Disposal Relief (BADR) and/or Investors’ Relief claims are made from that date.

The relief will be subject to eligibility conditions applying to both the individuals claiming the relief and the companies whose shares are being disposed of. While the criteria remain subject to consultation, the current proposals include a requirement that the founder making the claim have held 25% of the company’s ordinary share capital when trading (or preparations for trading) began, five years’ ownership of the shares, and five continuous years of UK residence before disposal. There are also detailed tests to be satisfied by the company relating to its UK residence, trading, turnover, and growth or innovation (measured by reference to R&D claims).

While the relief will be welcomed by some founders and significant early investors in high-growth companies, it is, in its current form, unlikely to apply to most private equity management teams or strategic scale-up investors (who will rarely have held 25% when the company’s trade or preparations began) or to pre-revenue companies (which are unlikely to satisfy the turnover thresholds). The technical consultation closes on 30 November 2026, with legislation to be added to Finance Bill 2026-27.

Separately, the BADR lifetime limit will fall from £1 million to £500,000 for disposals from 6 April 2027. BADR (formerly Entrepreneurs’ Relief) provides an 18% CGT rate instead of the usual 24% rate on qualifying business disposals, including share sales. This change reduces the maximum BADR tax saving for individuals from £60,000 to £30,000. Remaining relief depends on prior use of the BADR lifetime allowance.

Early-Stage Investment

The Seed Enterprise Investment Scheme, Enterprise Investment Scheme (EIS), and Venture Capital Trust (VCT) regimes will receive technical amendments, generally applying from 6 April 2027. The government has decided not to extend the company age limits, despite representations from the life sciences and deep tech sectors, citing the significant increases to the EIS and VCT limits announced at Budget 2025. HMRC will also increase scrutiny of fees that divert investment away from qualifying companies.

R&D claim notification forms will be removed for claims made from 1 April 2027, with the additional information form simplified from autumn 2027. Relief rates are unchanged.

Employee Share Schemes

The Company Share Option Plan (CSOP) scheme will be renamed EMI2. From 6 April 2027, its individual option limit will double to £120,000, its tax-advantaged exercise period will increase to 15 years, and the interaction with the Enterprise Management Scheme (EMI) individual option limit will be removed, allowing eligible employees to benefit independently from both schemes.

Companies transitioning to Employee Ownership Trust ownership will retain access to EMI, and options granted from 6 April 2027 will be reported through the annual return instead of being notified separately, which is a welcome change to the compliance burden for qualifying companies. The period in which EMI options can be exercised after a disqualifying event and retain full EMI tax treatment is to increase from 90 days to 180 days.

However, the government has still not answered calls from the private equity industry for the relaxation of the EMI and CSOP independence requirement, which continues to prevent private equity-owned companies from being able to grant EMI options as part of their employee incentive plans.

Other Highlights

Securities Transfer Tax

As previously announced, Securities Transfer Tax will replace Stamp Duty and SDRT from late 2027, retaining the 0.5% and 1.5% rates. Stamp duty will no longer apply to transfers of interests in partnerships that hold stock or marketable securities (such as fund secondaries transactions). However, this will be subject to a new anti-avoidance rule in this area. Draft guidance on these new rules is still awaited, and the exact commencement date in late 2027 remains to be set.

Corporate Tax Simplification

The government has launched a consultation on simplifying the corporate tax system to support business investment. The areas identified include interest withholding tax administration, the anti-hybrid mismatch rules, the controlled foreign company rules for groups within the scope of Pillar Two, the unallowable purpose rule, the patent box, and intangibles regimes. Those wishing to take part in the working groups should register their interest by 21 November 2026.

VAT

From April 2027, the VAT reverse charge on services from overseas will apply only where the UK recipient is VAT-registered. Where a UK recipient is not VAT-registered, the overseas supplier will be required to charge and account for UK VAT. This may affect holding companies, SPVs, and fund vehicles that are not VAT-registered and may require overseas suppliers to register and verify customer status. Further detail is awaited.

Tax Administration

The government will not proceed with requiring additional close company reporting of transactions with participators at this stage.

The minimum expenditure threshold for HMRC’s advance tax certainty service will fall from £1 billion to £300 million from 4 November 2026, widening access for qualifying UK investment projects.

From 1 April 2028, taxpayers will face an express obligation to address known errors in returns and other documents, with associated penalty changes.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.