Budget 2026 - some disappointment and a new relief

The UK Budget delivered on 28 October 2026 brought mixed news for individuals and business owners. Higher taxes on savings and property income and a further restriction of Business Asset Disposal Relief (BADR) sit alongside a proposed new capital gains tax relief for founders and significant early investors in high-growth businesses. The implications will depend on the nature of an individual’s assets and income.

Savers and property investors

For savers and property investors, the Budget made fairly grim listening.  Income tax rates on savings and property income will rise by four percentage points from 6 April 2027, rather than the two-percentage-point increase announced in Budget 2025, taking the basic, higher and additional rates to 24%, 44% and 49% respectively.  

Coupled with the forthcoming introduction from April 2028 of the High Value Council Tax Surcharge (HVCTS) on residential properties worth £2 million or more, colloquially referred to as the “mansion tax”, and a 3.5% increase in the rates of the Annual Tax on Enveloped Dwellings from 1 April 2027, the Chancellor's announcements are unlikely to help to revive the fortunes of the residential property investment market.  

They may do little to improve the position of those renting properties privately either, as landlords seek to recoup their increased tax bills through higher rents, and others sell, potentially reducing the pool of available rental properties.  Balancing this to some degree, the proposed zero-rating of VAT on land sold to registered social housing providers is clearly intended to increase the availability of social housing options.

Entrepreneurs and business owners

The news was mixed for those starting up, growing or investing in businesses, both their own and other people's, not least because the rates of income tax on dividends will not rise in line with those for savings and property income. 

The rate of Business Asset Disposal Relief (BADR) remains unchanged at 18%, with gains above the BADR limit continuing to be taxed at 24%.  However, a reduction in the lifetime limit for capital gains eligible for the relief from £1 million to £500,000 for BADR qualifying disposals made on or after 6 April 2027 is unwelcome, cutting the maximum potential saving from £60,000 to £30,000.  This may lead to an increase in disposals in advance of the change, where this is feasible.  

However, the proposed introduction of Founders' Relief, a new capital gains tax (CGT) relief aimed at founders of high-growth businesses, may provide an alternative for those individuals and businesses that qualify.

What is Founders' Relief?

The proposed relief is targeted at a relatively narrow group of founders and significant early investors, with demanding ownership, residence, company-size and growth conditions.

The Budget consultation indicates that this new relief will allow for a reduced 10% rate of CGT on qualifying disposals made on or after 6 April 2027, up to a lifetime limit of £10 million. This lifetime limit will be reduced by amounts claimed under the limits for BADR and Investors’ Relief from 6 April 2027. The limit will apply per individual, so more than one individual could claim in respect of the same company. 

The practical details may still be subject to change, but the current proposals provide that to qualify, an individual will need to: 

• be a significant early investor, having held at least 25% of the company’s ordinary share capital (together with corresponding voting rights and rights to distributable profits and assets on a winding up), at the point when the company's planned trading activity, or its preparation, commenced;
• have held the shares or securities for at least five tax years before their disposal; and 
• have been UK resident under the Statutory Residence Test for at least five continuous tax years before the disposal. 

The relief will apply to all shares disposed of by a qualifying individual, provided the conditions are met, and will not be restricted to shares acquired at the time the company was started or to an individual’s original shareholding. Only individuals will be able to claim the relief.

The company will need to: 

• be in scope of UK Corporation Tax (either UK-resident for Corporation Tax purposes, or carrying on business in the UK through a permanent establishment); and the business must have a substantial UK presence for the five accounting periods before disposal; 
• be a trading company, or the holding company of a trading group, without substantial non-trading activities or excluded trading activities such as dealing in land, financial services, or property development; 
• continue the new trade it was established for when the founder's shares were issued with no major change in the nature of the trade. Any other trades will be treated in a similar way to excluded trades; 
• have generated turnover of at least £10 million in the accounting period prior to disposal; and 
• have employed at least 15 qualifying full-time employees in the accounting period prior to disposal. 

In addition to the above, there will also be conditions relating to growth and innovation. For a disposal of shares to qualify, the company will need to meet at least two of the following three tests: 

• Turnover test: Annual average compound growth in turnover of 25% across three consecutive accounting periods within the ten years before disposal, with turnover of at least £10 million in the accounting period before the first of these three periods. 
• Headcount test: Annual average compound growth of at least 25% in qualifying full-time equivalent employees across three consecutive accounting periods within the ten years before disposal, with at least 15 full-time employees in the accounting period before the first of these three periods. 
• Innovation test: the company must (1) have incurred qualifying expenditure of £1.5 million or more on research and development (R&D) for which it met all of the conditions to make an R&D tax relief claim and (2) have claimed R&D tax reliefs for that expenditure for an accounting period or periods ending within the three years before disposal. 

In designing these tests, the government's stated intention is to focus on companies whose sustained growth is most likely to bring wider benefits to the UK through jobs and innovation, and the requirement for two of the three tests to be met will allow companies to qualify if they meet the turnover and headcount tests.

Clearly, the proposed tests are stringent and the potential administrative and compliance requirements add further complexity.  Accordingly, it is quite possible that changes will be made as a result of responses to the consultation.  If not, the number of business founders that are able to qualify for the relief may be limited, which may make the reduction in value of BADR a more significant concern. 

Pensions, charitable gifts and inheritance tax 

A separate but important clarification concerns the forthcoming extension of inheritance tax (IHT) to unused pension funds and pension death benefits from 6 April 2027 – a significant planning concern for many people.  

There are many issues that require resolution before the changes are introduced. However, one point that has been a source of some discussion is how an estate will be valued for the purposes of the reduced (36%) IHT rate when at least 10% is left to charity, once an individual's pension funds and death benefits are also included as part of their taxable estate. Initially, the indications were that pension assets would be included as part of the 'general component' of the estate, meaning that many estates would be required to donate a significantly larger sum than the testator might have planned in order to qualify for the lower rate. This could be a particular issue where the charitable gift needed to satisfy the 10% test had to be funded entirely from the free estate rather than shared with the pension.

Accordingly, it is welcome that the Budget included a brief note confirming that legislation will be introduced to allow estate administrators to decide whether notional pension property is included in the general component of the estate or as a separate component for these purposes.  

What now?

The Budget measures discussed above, and others announced by the Chancellor, will have different implications according to an individual's circumstances.  Some details remain subject to consultation or further clarification, particularly the proposed conditions for Founders’ Relief, the extension of IHT to pensions and its interaction with the reduced rate for charitable giving. These will need to be taken into account when considering a business or property transaction, or reviewing a Will or wider estate planning arrangements.

In the meantime, it makes sense to review the likely impact and the planning options available. With many of the changes due to take effect on 6 April 2027, an early review will help identify where action may be appropriate before then and where decisions should await further detail.

If you would like to discuss any of the points raised above or the Budget measures more generally, please get in touch with your usual Howard Kennedy contact, or a member of our Wealth and Succession team. 

Nothing in this client note constitutes legal advice to any person.