Autumn Budget 2026: A mixed picture for capital allowances and property investment

The Budget 2026 maintains generous upfront capital allowances but comes with the sting in the tail of further slowing the rate of relief for expenditure that remains in the main pool.

Alongside these changes, there are developments affecting major property investment projects, property investors and R&D tax relief claims, while questions remain over the future of land remediation relief.

Capital allowances

The Government’s commitment to maintaining 100% full expensing for main pool plant and machinery provided welcome reassurance but was effectively a re-announcement of the position established in its October 2024 Corporate Tax Roadmap.

A more substantive, but unwelcome, announcement was the further reduction of the main rate of writing-down allowance (WDA) from 14% (as introduced from April 2026), down to 12% for periods starting from April 2027. For affected businesses, this will defer relief, increasing near-term tax liabilities. Fortunately, the £1 million 100% annual investment allowance (AIA) and uncapped 100% full expensing for companies continue to provide immediate relief for a significant amount of qualifying expenditure. 

However, the WDA reduction could affect both companies and unincorporated businesses, such as partnerships, that have unrelieved main pool balances brought forward, or expenditure that is not eligible for these accelerated allowances. This includes some expenditure on second-hand, used assets and equipment acquired for leasing.

On the positive side, there is a corresponding improvement for some new investment because the accelerated main rate first-year allowance for new, unused, main rate plant or machinery (introduced for expenditure incurred from 1 January 2026) will increase from 40% to 50% for expenditure incurred from 1 January 2027. This is particularly helpful to unincorporated businesses, which cannot claim full expensing, and businesses acquiring plant or machinery under some leasing circumstances that are otherwise ineligible for first-year allowances.

Major projects and predevelopment costs

HMRC offers an Advance Tax Certainty Service, which allows businesses undertaking major investment projects to obtain binding confirmation from HMRC about how a range of tax rules will apply. From 4 November 2026 the minimum investment threshold to use this will fall from £1 billion to £300 million. This should allow more projects to obtain comfort about significant tax questions, including whether expenditure qualifies for capital allowances.

Also, following the Supreme Court’s decision in Orsted West of Duddon Sands (UK) Ltd (now named Orsted Schroders Greencoat WODS Holdco Ltd) v HMRC [2026] UKSC 12, which found that expenditure ‘on the provision of’ plant or machinery is a narrow test requiring a close connection between the plant or machinery and the expenditure in question, the Government also plans to continue its work on the treatment of predevelopment costs. These are costs incurred before assets are provided, such as feasibility studies, obtaining planning or other regulatory approvals and various preparatory activities. 

The Government’s initial focus will be on clearer guidance, including practical examples and approaches to apportioning expenditure. Targeted legislative changes may be considered if guidance alone cannot provide sufficient certainty. This is welcome because despite the Court’s clear ruling and updated HMRC guidance, the treatment of such costs is now materially less certain to deal with in practice than it used to be, and as the Chartered Institute of Tax (CIOT) pointed out in September 2026, a lack of relief for essential business costs undermines a rational business tax system and encourages investors to look elsewhere.

Sovereign property investment

From 1 January 2029 the Government proposes to tax UK property investment income and gains of foreign sovereign investors, alongside providing bespoke access to the Real Estate Investment Trust (REIT) regime that generally exempts qualifying companies’ property rental profits and gains from tax, with investors instead taxed on property income distributions (PIDs), calculated after deducting capital allowances. 

These changes will place greater focus on capital allowances claims as a means of managing tax liabilities. For investments held within REITs, the existing ‘shadow’ capital allowances rules require the maximum available capital allowances (excluding first-year allowances and the annual investment allowance) to be deducted when calculating the REIT’s property rental business profits.

Land remediation relief

Land remediation relief was last amended in 2009 and the Government’s July 2026 consultation, which concluded in September, considered changes including aligning eligibility with planning requirements, making it easier for derelict land to qualify and allowing developers to obtain relief sooner for revenue expenditure. The Government intended to announce its conclusions at Budget 2026 and legislate for any reforms through Finance Bill 2026, with changes taking effect as soon as practicable.

The proposals to make it easier for derelict land to qualify and allow developers to obtain relief sooner for revenue expenditure were widely welcomed. However, the proposal to align eligibility with planning requirements was much less popular and the Government has decided not to proceed with any of the changes at this stage.

R&D tax

The removal of R&D claim notification requirements for claims made from 1 April 2027, followed by the streamlining of the Additional Information Form (AIF) from autumn 2027 should reduce administrative burdens.

The Government is also exploring wider improvements to the claims process and potential simplification of the enhanced R&D intensive scheme (ERIS) support intensity ratio, the PAYE/NIC cap and going concern requirements. 

R&D claims could also become more important to shareholders seeking to benefit from the proposed 10% capital gains tax Founders’ Relief. Companies must meet at least two of three growth and innovation tests, as well as other conditions. The innovation test requires at least £1.5 million of qualifying R&D expenditure to have been claimed for accounting periods ending within the three years before disposal. For some businesses, a robust R&D tax relief claim could therefore contribute to tax savings on business activity while reducing shareholders’ capital gains tax liabilities through Founder’s Relief.