The Chancellor has delivered his Autumn Budget. While there were relatively few new tax announcements, the Chancellor has already done much of the Budget heavy lifting through the announcements made in June and July and by continuing with his predecessor’s pre-announced policies.
The Budget therefore needs to be considered alongside the measures previously announced by the Government and the changes which are already approaching implementation. Together, these inform the tax landscape in which businesses and individuals will operate.
What was announced?
Cost of living and support for business
The Chancellor confirmed that the VAT rate on supplies of electricity to consumers (as distinct from businesses) will be set at 0% from 1 October 2026 to July 2027, rather than the traditional 5% rate.
There will also be a 20% reduction in business rates for qualifying pubs, social clubs and live music venues in England from April 2027. We can already foresee the inevitable challenges in drawing the boundaries here, including determining when a pub which serves alcohol and food crosses over into becoming a restaurant or hotel.
Further reforms will be made to Small Business Rates Relief to reduce the burden on small businesses in the retail, hospitality and leisure sectors. The threshold will increase from £12,000 to £18,000, although vaping and gaming venues shouldn’t benefit.
Tax-raising measures
The Chancellor has undertaken to maintain a certain amount of fiscal headroom, while the cost of living support package also needs to be paid for. A number of tax-raising measures therefore form part of the wider Budget package.
Capital Gains Tax
In the run-up to the Budget there was intense speculation that the Chancellor would increase Capital Gains Tax (CGT) rates for individuals and trusts.
Capital gains for individuals and trusts are taxed at an upper rate of 24%, which may be reduced to 18% if Business Asset Disposal Relief (BADR) is available. This contrasts favourably with income tax rates. For example, the additional income tax rate is 45%, although the additional rate for savings and property income is scheduled to rise to 47% from 6 April 2027.
The Chancellor ended this speculation by ruling out a rate rise on 19 October. However, this is not quite the end of the story. BADR provides an 18% CGT rate, subject to a lifetime limit of £1 million. The Chancellor announced that the lifetime limit will be cut from £1 million to £500,000 from 6 April 2027. As this change does not have an immediate effect, it may therefore be possible to ‘bank’ BADR by structuring a sale to take effect before the change to the lifetime limit.
The Government’s consultation, ‘Modernising the taxation of distributions and capital repayments from companies’, may also move a number of transactions out of the CGT regime and into income treatment. This may raise the tax take, but via the back door. Reforms are expected in this area from April 2028.
So, the takeaway is that although the headline CGT rates are not increasing, a number of transactions may end up suffering a greater tax burden than is currently the case.
Founders’ relief
The Chancellor announced plans for a new founders’ relief, providing a 10% CGT rate for qualifying founders of high-growth innovative companies on gains up to £10m (Entrepreneurs’ Relief 2.0 with a modern twist?). A consultation has been launched on the design of the relief. The detail will be important in determining which founders and businesses will be able to benefit.
Online marketplaces – levelling the playing field
The previous Government introduced measures to address VAT irregularities arising where overseas sellers sell to UK consumers through online marketplaces. However, the irregularities identified have developed over time.
For example, some overseas sellers are holding themselves out as UK-based sellers below the VAT registration threshold. UK sellers that should be registered for VAT may also fragment their sales across a series of online marketplaces so that they appear not to be VAT registered.
The Chancellor’s response is to treat all sales by online marketplaces as subject to VAT. The relevant business will be treated as making a supply to the online marketplace at 0%, with the online marketplace making a supply to the customer at the standard rate.
This enables HMRC to collect VAT from a person of substance, namely the online marketplace. The change is scheduled to take effect from October 2027.
Employee incentives: EMI2 and EMI
The Company Share Option Plan (CSOP) will be rebranded as EMI2 from 6 April 2027 and realigned to be more useful.
The current £60,000 limit on the value of shares under option, calculated at the option grant date, will increase to £120,000. The option exercise period will also increase from ten to 15 years.
This should be a helpful change, as not every company is eligible for the more flexible Enterprise Management Incentive (EMI) share option, and many companies outgrow it. EMI2 should be a powerful tool where EMI is unavailable, including for more senior employees. Where available, it should enable the award holder’s return to be charged to CGT rather than income tax.
There will also be a favourable change to the EMI rules from 6 April 2027. The current separate requirement to notify EMI options granted will be removed. Instead, EMI options will be notified through the annual return process.
Capital allowances – some pluses and some minuses
The 100% full expensing relief for the purchase of certain new items of plant and machinery will be retained. The capital allowances relief on certain first-year assets will also increase from 40% to 50% for expenditure incurred on or after 1 January 2027.
However, the main rate of writing-down allowance will reduce from 14% to 12% from 1 April 2027 for corporation tax and from 6 April 2027 for income tax.
Purchasers of plant and machinery should be aware of these rate changes when making their investment decisions.
LLCs and US transactions
Limited liability companies (LLCs) are commonly used in US-based transactions. UK sellers most often come across them when a US private equity house or trade buyer asks UK sellers to roll over into a US LLC structure on an exit.
Under the current rules, there is a mismatch between the US and UK tax systems which can result in UK residents being taxed twice on returns from LLCs. The Chancellor announced a relieving measure to address this mismatch, which will be implemented when the Finance Bill takes effect. This is good news because the change is designed to facilitate deals with US buyers.
Measures announced earlier this year
The Government announced draft legislation and consultations in June and July which the Chancellor has now confirmed.
Stamp duty reform
The UK currently has two separate regimes for levying stamp ‘taxes’ on share transactions: stamp duty and Stamp Duty Reserve Tax (SDRT).
The stamp duty rules date back to at least the 18th century. The requirement to stamp a paper form, and the consequence that an unstamped document cannot be used as evidence in judicial proceedings, makes little sense to an international, 21st-century buyer.
This disconnect with the modern world can cause real irritation if a company sale is delayed by the need to stamp a stock transfer form executed between parties on the sell side.
For example, an employee benefit trust which holds shares in a target company may wish to transfer shares to employee beneficiaries. The need to stamp the stock transfer forms can create the risk of a transaction delay.
The point that SDRT may be imposed if stamp duty is not paid can also appear confusing and illogical: why impose a tax to ensure compliance with a duty? From a date to be announced in 2027, stamp duty and SDRT will be amalgamated into a new Securities Transfer Tax (STT).
STT will be paid and returns submitted through an electronic HMRC portal. Many of the existing rules used to calculate consideration for stamp duty purposes will also be removed, including the contingency principle.
We expect versions of reliefs from stamp duty, including section 42 group relief, section 77 relief and section 75 relief to be preserved. The policy intention is to replace stamp duty and SDRT with a more modern tax which will help to speed up the transactional process.
However, STT is, as its name suggests, a tax. The draft legislation gives HMRC broad powers to check the position taken in an STT return further down the line. The proposed time limits are determined by taxpayer behaviour and can extend to 20 years in some circumstances.
This is a significant change. Clients which buy companies need to understand that submitting an STT return does not complete the process and that HMRC may check the position at a later date.
Duty to correct tax errors
Draft legislation plans to impose duties on taxpayers to disclose and correct tax errors. Under the current draft, a taxpayer that does not disclose and correct a tax error faces the risk of a 100% penalty and a 20-year assessment window. The legislation is scheduled to take effect from April 2028.
In the M&A market, uncertain or incorrect tax positions typically arise as part of a due diligence process. They are routinely addressed through voluntary disclosures and retentions.
The draft legislation can only reinforce this trend. Buyers of target companies will be strongly incentivised by the risk of penalties arising after completion to flush out errors by making disclosures to HMRC, backed up by the use of retentions.
The impact of these changes will not be restricted to the M&A context. Any company which submits tax returns, including PAYE, VAT and SDLT, will need to understand its duty to correct errors to guard against the penalty risk.
VAT treatment of land for social housing
Social housing providers are VAT exempt, meaning any VAT charged to them is an absolute cost. It is not uncommon for a social housing provider to buy land from a landowner which has exercised the VAT option to tax. This creates a “lose, lose” scenario.
If the social housing provider is charged VAT, it incurs an irrecoverable cost. Alternatively, it may serve a notice which disapplies the seller’s option. However, this may create VAT-related costs for the seller, ranging from irrecoverable VAT on sale costs to capital goods scheme adjustments.
Social housing providers have responded to this issue in several ways. Land sales may be deferred until sufficient works have been completed to reach “golden brick” stage. This enables the land sale to be zero-rated while preserving the seller’s VAT recovery position.
Some social housing providers have also established in-house development companies which acquire the opted land and develop it to at least golden brick stage before selling it to the social housing provider. The industry believes these workarounds increase transaction costs which impede the worthwhile goal of constructing social housing.
The Chancellor has accepted that the sale of land to a social housing provider should be zero-rated.
Anti-avoidance measures will also be included to ensure that the social housing provider uses the land for social housing and not for another activity.
This reform is helpful for social housing providers. The measures are expected to take effect from April 2027. You can find further insight on this here.
Hold-over relief
Hold-over relief allows individuals to gift shares in trading companies to other individuals without incurring an immediate CGT charge.
A technical issue has been identified where the shares gifted are in a company whose asset base includes goodwill or intangible assets alongside assets within the chargeable gains tax regime.
The result is that the current rules can impede the CGT-free transfer of shares between individuals, potentially creating difficulties in the family succession context. The Government has accepted that the rules are not working as intended and introduced legislation to address this from 6 April 2027.
This will facilitate transfers between employers and employees and between family members by removing an unintended CGT charge. However, the existing issue remains relevant for gifts made before 6 April 2027.
Overseas branches
It is not uncommon for a UK company to begin its overseas operations through a branch. Where the branch is loss-making, those overseas losses can currently be offset against UK profits.
For accounting periods beginning on or after 1 January 2027, legislation will prevent this loss offset. The overseas branch will be deemed to have made a “branch profits election”, which has the effect of treating it as a company for certain UK tax purposes.
This is a very complicated solution for giving effect to the Government’s goal. It raises the question of how profits are to be divided between UK operations and the overseas branch.
Depending on the volume of transactions between the company and the overseas branch, those transactions may also need to be reported on the International Controlled Transactions Schedule for accounting periods beginning on or after 1 January 2027.
Changes already approaching implementation
A number of previously announced measures are now moving closer to implementation and form an important part of the wider tax landscape.
Frozen tax bands
Income tax bands will remain frozen until April 2031. The £325,000 inheritance tax lifetime allowance will also be frozen until April 2031, while the pensions annual allowance remains at £60,000 and the CGT annual allowance at £3,000.
The policy intent is clear: in times of relatively high inflation, these freezes to reliefs and thresholds should raise more money through “fiscal drag”.
The freezes increase the likelihood of taxpayers being drawn into higher or additional rates as their taxable income rises. They also increase the risk of taxpayers being affected by the £100,000 “tax trap”.
For every £2 of taxable income above £100,000, the personal allowance reduces by £1. If a taxpayer has taxable income of £125,140, the slice between £100,000 and £125,140 is taxed at an effective income tax rate of 60%.
In addition, where a household has a member with adjusted taxable income above £100,000, the household immediately loses its entitlement to tax-free childcare and funded childcare hours for children under three.
The £100,000 cliff edge will therefore need to be considered carefully by anyone devising an incentive or bonus scheme where the return is taxed as income.
Property and savings income
From 6 April 2027, income tax rates on property and savings income for individuals and trustees will increase to 24% for basic-rate taxpayers, 44% for higher-rate taxpayers and 49% for additional-rate taxpayers.
Where possible, individuals and trustees should consider recognising property and savings income before the rates increase.
It may also be possible to recognise expenses and tax reliefs after the rates have increased. For example, if an individual receives property income and the property is eligible for capital allowances, it may be possible to make the capital allowances claim after property income tax rates have increased, thereby saving income tax at the higher rate.
There is a further consequence for savings income. The increase will apply to tax withheld at source on interest income, with the rate rising from 20% to 24% from 6 April 2027.
This issue often arises in relation to interest-bearing vendor loan notes, so it will be necessary to ensure that tax is withheld at the correct rate.
Separately, the Chancellor has confirmed that the cash ISA annual allowance will remain at £20,000 rather than being reduced to £12,000.
Inheritance Tax
From 6 April 2027, undrawn defined contribution pension pots and certain defined benefits will be brought within an individual’s estate for Inheritance Tax purposes.
This change should be interpreted as part of a series of Inheritance Tax reforms introduced by the Government.
At its most fundamental level, the change increases the size of an individual’s death estate. Individuals affected will need to take this into account when determining their succession planning strategy.
High Value Council Tax Surcharge
The High Value Council Tax Surcharge (HVCTS) is scheduled to take effect from April 2028.
It will be assessed annually using April 2026 property values and will apply to property owners, including non-natural persons such as companies. Charges will begin at £2,500 for properties worth between £2 million and £2.5 million and rise to £7,500 for properties valued at £5 million or more.
The Valuation Office intends to publish a draft list of affected properties in late 2027. Owners will then be able to correct factual inaccuracies and make representations before the final list is produced.
Once final banding has been established, owners will have an initial eight-month formal challenge period. Property owners who may be affected may therefore wish to consider lining up surveyors to challenge valuations if required.
What should businesses and individuals consider?
Although the Chancellor ruled out an increase in headline CGT rates and made relatively few entirely new tax announcements, this does not mean the tax landscape is standing still.
Measures such as the reduction in the BADR lifetime limit and the consultation on distributions and capital repayments could still increase the tax burden associated with taking value from companies.
The proposed duty to correct tax errors may reinforce existing trends in M&A, with buyers strongly incentivised to flush out errors through disclosures and retentions. The introduction of STT may modernise the transactional process, but it will also mean that submitting a return does not necessarily complete the matter.
The social housing VAT reform should be helpful. The proposed treatment of overseas branches is highly technical and raises questions about how profits will be divided between UK and overseas operations.
Businesses and individuals should consider how the measures may affect transactions, investment decisions, employee incentives, overseas operations, property holdings, succession planning and tax compliance.
Our tax team will continue to monitor the legislation and consultations as they develop and advise on the practical implications.
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