John Healey took time in his Budget speech to pay tribute to Rachel Reeves as the first woman to hold the office since it was created in 1221, when Eustace of Fauconberg was appointed during the minority of Henry III. He didn't mention his own part in her downfall after only two years in office, which had allowed him to take her job. 

In preparing his Budget, he must have looked at the holes she had made in Labour's manifesto commitment to 'not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT' and decided to drive a coach and horses through them.  

To the relief of many taxpayers, he shied away from some of the more dramatic ideas that had been floated in the press: increases to capital gains tax, wealth taxes, exit taxes, etc, which had led to a further exodus of wealth creators from the UK.  Farmers and others will remain disappointed that nothing has been done to mitigate the impact of the increased inheritance tax burden on family farms and businesses. 

Overall, Healey's approach seems to have been to do no harm, a trick he may think he largely managed to pull off, but farmers, landlords and savers may not agree. 

Income Tax

Non-headline rate increases 

Following Rachel Reeves' decision last year to judiciously breach Labour's manifesto commitment by increasing the rates of income tax on dividend, property and savings income by 2 percentage points (except for the dividend additional rate) from 6 April 2027, John Healey announced he would go one step further. Also from 6 April 2027, he will add a further 2 percentage points to each rate of income tax on property and savings income, producing a basic rate of 24%, higher rate of 44% and an additional rate of 49%. Savings income includes gains realised on life insurance products such as offshore bonds, but not offshore income gains.   

Eagle-eyed readers will have spotted the sleight of hand in this year's Budget document, in which the government applauds itself for having stuck to its commitment of not raising the 'headline' rates of income tax. 

Trading allowance 

The trading allowance, which allows individuals (especially those reselling through sites such as eBay and Vinted) to receive up to £1,000 of trading and miscellaneous income tax-free each year, will be increased to £3,000 with effect from 6 April 2027. This is a pragmatic measure in an area where the cost of enforcement generally exceeds the tax payable. 

Capital Gains Tax

Founders' relief – plus ça change

The government intends to introduce a new CGT relief, albeit only after a technical consultation. Where the relief applies, it is intended that the rate of CGT on qualifying disposals of shares will be reduced to 10%, up to a lifetime limit of £10 million of qualifying gains per individual. Sound familiar?

The government states that the relief is intended to support 'the talented individuals who take risks to build and scale high-growth, innovative companies in the UK'. Under the proposals, both the individual and the company will have to meet requirements. For example, the individual must have held 25% of the shares from the start of the company's trade and must have held the shares and been UK tax resident for at least five years before the disposal. For the company, it must be trading, subject to UK corporation tax, have had a turnover of at least £10 million in the accounting year prior to the sale and employed at least 15 people full time. The company must also be able to demonstrate 'success in terms of growth and innovation'.  

It might be hoped that, following the consultation, the conditions on which the government finally settles are not so narrowly drawn that this relief fails to achieve its laudable objective. The relief is scheduled to be available for disposals made on or after 6 April 2027. 

Business asset disposal relief

What is given with one hand is taken away by the other. Business asset disposal relief ('BADR') reduces the rate of capital gains tax for entrepreneurs on the sale of a business or shares in a trading company to 18%. This relief has existed in some form or other for as long as there has been capital gains tax. In recent memory, Entrepreneurs' Relief (the predecessor to BADR), where available, acted to bring the rate of CGT on qualifying disposals down to 10% for up to £10m of lifetime gains. 

The lifetime limit has been chipped away over time, most recently falling to £1m. Following the Budget announcement, the limit will now fall to just £500,000 from 6 April 2027. With the differential in tax rate of only 6 percentage points (for higher rate taxpayers) when the relief applies, this means that new users of the relief will stand to save a maximum of £30,000 – not an insignificant amount, but likely of limited interest to internationally mobile serial entrepreneurs. 

Protected cell companies

As previously announced, the government will introduce legislation (taking effect from 28 October 2026) to amend the CGT anti-avoidance rules for non-resident close companies.

Under the present rules, very broadly, a UK tax resident shareholder who holds a greater than 25% interest in a non-UK incorporated 'close' company is subject to CGT on a pro rata share of the gains realised by the company, unless certain exceptions apply. A 'close' company is a company which is under the control of a small number of people. 

Protected cell companies are a legal arrangement in which assets of a single company may be segregated into 'cells', the value of which is attributable only to certain shares in the company. Such protected cell companies are useful collective investment vehicles in appropriate circumstances, offering protection from cross-contamination of liabilities between cells with different investment mandates, or for insurance transactions.  

The present capital gains anti-avoidance rules relating to non-UK close companies do not always work as intended in respect of protected cell companies. The government intends to tighten the rules to capture gains arising in protected cell companies where relevant tests and thresholds are satisfied by the company and any UK tax resident investors. Certain investors will have invested in protected cell companies unaware of the present inconsistency in their UK tax treatment and should take advice on the effect of the change. 

Temporarily migrating trusts – relief for the belatedly advised 

Filling out the Budget papers with previously announced changes, the government confirmed an exemption from the capital gains tax 'exit charge' that applies when a trust ceases to be resident in the United Kingdom.  The exemption takes effect from 28 October 2026. It applies where a trust became UK resident because a trustee moved to the UK and ceases to be UK resident shortly afterwards. 

This is a sensible change. It is not uncommon for individuals acting as trustees of non-UK tax resident trusts to move to the UK unaware that their new UK tax residence could bring the income and gains of the trust itself within the scope of UK taxation. This change should allow a degree of flexibility in such situations, allowing a non-UK resident trustee to be appointed as replacement.

Stamp Duty and SDLT

Deductions

Unexpectedly, this summer, the Court of Appeal found against HMRC as they sought to challenge a scheme entered into by a Mrs Elborne to reduce the value of her home for IHT purposes – the so-called 'home loan scheme'. Over many years, HMRC has sought to counteract such schemes as an abuse of the tax system. In the face of this reverse, the upcoming Finance Bill will enact a new rule to ensure only 'properly incurred' liabilities will be taken into account, which will take effect from 28 October 2026.  Any taxpayer joy has been short-lived. 

Pensions and charitable relief

Broadly, when a person leaves 10% or more of their estate to UK charities, the rate of inheritance tax payable on their death reduces to 36%. With the extension of inheritance tax to pensions from 6 April 2027, there had been a concern that to benefit from the 36% relief it would be necessary to leave an amount equal to 10% of a person's pension (in addition to their other assets) to charity. However, the government intends to introduce legislation which allows executors to decide whether or not the pension is, in effect, treated as part of a person's estate when considering whether 10% has been left to UK charities. If opted out, the pension would be taxed at 40% (subject to other reliefs).  

Anti-avoidance

Tax the rich

Published with the Budget was a further paper from HMRC setting out how it engages with 'wealthy taxpayers'. HMRC categorises these as those with income over £200,000 or assets over £2 million.  The intersection between the wealthy and the 'working people' who will not have their income tax increased is not explained. 

HMRC notes that the wealthy taxpayer 'tax gap' (being the difference between the amount of tax that is paid and the amount that should be paid) is estimated (with 'high' uncertainty) at £3.6bn, or 5.4%.  This is in the context of a total tax gap for Self Assessment of £14.6bn.  HMRC also highlights that the overall tax gap for Self Assessment is 15.9%, suggesting that the wealthy are already significantly more diligent (or perhaps better advised) in completing their tax returns. Nevertheless, HMRC considers that the wealthy continue to merit a particular focus, which it proposes to deliver in the traditional way by (i) making better use of the extensive information it already has and (ii) employing more people. 

Distributions and repayments of capital from companies

A consultation has been announced on the taxation of distributions from companies. The main thrust of the consultation is driven by HMRC's desire to restrict the interposition of holding companies as a technique to allow for the extraction of profit at capital gains tax rates.  

Measures are also proposed to align the position for UK and non-UK companies. Up to this point, the government has been content to allow (the relevant) foreign law to determine whether dividends from foreign companies were to be treated as income or capital. Going forward, HMRC proposes that the default position will be that all dividends are to be income in nature.

The 'loans to participators' rules that apply to UK companies will also be extended to non-UK companies, with the modification that the associated tax charges will fall on the participator (who will be UK resident) rather than the company.

Further reform

Limited liability companies ('LLCs')

The government has now responded to its consultation on the UK taxation of individuals investing through entities, such as US LLCs, that are treated as transparent overseas but opaque in the UK. This mismatch can result in foreign tax being imposed on the underlying profits, followed by UK tax when those profits are distributed, without corresponding double-tax relief.

The government has acknowledged the problem but has decided against making US LLCs fiscally transparent for UK purposes. Instead, it proposes to introduce an elective domestic foreign tax credit mechanism.  Under the proposed approach, specified entities, including US LLCs, would continue to be treated as opaque for UK tax purposes, with distributions taxable at UK dividend rates. Individual investors would, however, be able to elect to claim a credit for eligible foreign taxes personally paid on the entity's underlying profits, income and gains, including federal, state and local taxes.

This is a welcome development, although important details remain to be resolved.  Further technical consultation is expected, with claims under the new relief intended to be possible from early 2028 (with the government also considering how to address historic periods and ongoing disputes). 

Foreign sovereigns

At present, the UK's tax treatment of foreign sovereign investors is based on principles of international law and HMRC practice. The government now proposes to put the rules on a statutory footing, in common with many other jurisdictions. The changes are expected to apply both to sovereigns and to their personal investment companies (which companies are generally perceived to be manifestations of the sovereign under the current principles).

In the Budget documentation, the government stresses that it wants the UK to continue to be an attractive location for sovereign investors, noting their importance as 'providers of capital across a wide range of UK investments'. The changes are, however, likely to increase the UK tax burden on sovereigns, particularly with respect to UK property-derived income and gains.  UK trading income will generally also be within scope. 

Importantly, it is suggested that investment management activities undertaken by sovereign investment offices will be exempted from tax, along with gains arising to state-operated overseas pension funds.

Changes will only take effect from 1 January 2029, giving time for consultation and refinement of the current headline proposals.