Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

‘And Now, Exhale’: UK Autumn Budget 2026

Skadden Publication

Patrick O’Gara Katie Barnes John Papadakis Alex Rigby Imogen Adams Conor J. McGorman Olivia Moul Grace Vaughan-Jeffrey

Executive Summary

  • What’s new: The UK Autumn Budget 2026 announced a broad range of tax rises, including a temporary increase in the banking surcharge to 6% and wholesale reform of the taxation of sovereign investors.
  • Why it matters: The tax rises affect businesses, investors and individuals. The changes impact banks, foreign sovereign investors in UK real estate, UK individual investors in US LLCs and foreign corporations, founders and online marketplaces.
  • What to do next: Shareholders and investors considering an exit should consider carefully the timing of any disposal. Earlier transparent filing positions should be kept under review, and businesses wishing to contribute should consider responding to the Call for Evidence on Modernising the Administration of Corporation Tax.

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The UK Autumn Budget 2026 announced a broad range of tax rises affecting businesses, investors and individuals, with very little in the way of fiscal measures designed to increase the competitiveness of the UK as a place to invest and do business. Chancellor of the Exchequer John Healey’s key message to the country was his desire to create “breathing space for today, hope for the future.” Business will no doubt breathe a sigh of relief that Wednesday’s measures were not quite as bad as they might have been, but the government’s fiscal agenda for business was underwhelming and is unlikely to contribute in any meaningful way to encouraging growth in the UK economy.

Headline changes include:

  • A temporary 15-month increase in the banking surcharge to 6%.
  • Wholesale reform of the taxation of sovereign investors, bringing them into the charge to tax on UK real estate for the first time.
  • Broadening of the UK’s distribution rules, which will increase the scope of the charge to income tax on distributions and repayments of capital by foreign companies.
  • The extension of online marketplace value-added tax (VAT) liability to UK sellers.
  • Tightening of UK capital allowances for UK business investment.

On the more positive side of the ledger, the government intends to make provision for double tax relief for UK investors in US LLCs and other reverse hybrids, the threshold for obtaining binding clearances from HMRC has been significantly reduced, and the government announced a consultation mooting potential simplification of UK corporation tax, which seems most remarkable for its lack of scope and ambition. Healey foreshadowed a new 10% capital gains tax (CGT) rate for founders, capped at £10 million, but the underlying detail suggests few entrepreneurs will be able to reliably anticipate satisfying its incredibly strict conditions.

Table of Contents

Temporary Increase in the Banking Surcharge

The Budget temporarily doubles the surcharge on bank profits from 3% to 6%, on top of the regular corporation tax charge at 25%, a measure which is expected to raise just under £1.5 billion. The surcharge will apply to surcharge profits above the unchanged £100 million allowance. The increase will also apply to the supplementary controlled foreign company charge for banking companies. The 6% rate, less than the increase to 8% that some had anticipated, will apply from 1 January 2027 to 31 March 2028, reverting to 3% on 1 April 2028. Accounting periods spanning this date range will be split into notional periods, with rates and allowances apportioned accordingly.

Sovereign Tax Status Regime

In an unexpected tax raising measure, Healey announced in his Budget speech that he will tax foreign sovereign investment in UK real estate for the first time, foreshadowing a new legislative framework that will apply from 1 January 2029 that is expected to raise over £2.6 billion by 2032. As a sweetener, the UK’s REIT regime will be reformed to facilitate investment by sovereign investors through UK companies, which will be subject to tax at 15%, and there will be a general rebasing of base cost in UK real estate to reflect its value at 1 January 2029. State-operated pension funds will be exempt from tax on capital gains on UK land in line with their peers. Foreign sovereign investors will continue to be exempt from UK tax on UK source interest income, and a new investment management exemption will be introduced for UK investment offices managing foreign sovereign wealth. The government’s intention is that the new regime will be at least comparable to or more generous than that available in other countries. However, while the UK’s current rules are indeed more generous than many of its peers internationally, this announcement will undoubtedly reduce the attractiveness of the UK as a place to invest for foreign sovereigns and wealth funds, at a time when the government is seeking to promote foreign investment and growth in the economy — a step the last government decided against when it withdrew similar proposals in 2023.

Modernising the Distributions Framework

In the launch of HMRC’s consultation on the taxation of distributions and repayments of capital earlier this year, the government outlined its view that the current system of overlapping and complex rules has produced distortive outcomes, with economically similar payments receiving different tax treatment.

The Budget confirms that all seven proposals from the government’s consultation will be taken forward as a cohesive package to improve clarity, modernise the rules and tackle avoidance, covering: (i) reduction of share capital; (ii) demergers; (iii) distributions from non-UK resident companies; (iv) the interaction between debt, loans and the distributions legislation; (v) loans and other temporary extractions from non-UK resident companies; (vi) purchase of own shares; and (vii) capital extraction anti-avoidance.

Key reforms include:

  • The treatment of distributions by non-UK companies, which currently depends on their characterisation under foreign law, will be aligned with that applicable to distributions by UK-resident companies and be brought within the charge to UK income tax.
  • Returns on asset managers’ co-investment and genuine investment returns in fund structures are expected to retain capital treatment, and double taxation will be addressed.
  • The conditions for statutory demergers will be reformed and significantly relaxed.
  • A temporary tax charge, similar to the loans to participators charge for UK companies, will apply to loans or advances made to UK-resident participators by non-UK resident companies.

Technical consultation on the rules and draft legislation will take place in 2027, with changes expected to apply from April 2028.

Tax Treatment of Predevelopment Costs

The government has published a summary of responses to its consultation on the tax treatment of predevelopment costs. This consultation was held following the Supreme Court decision in Orsted, a case that revealed the uncertainties in the availability of deductions for predevelopment costs that are capital in nature. The government will work with stakeholders to improve HMRC guidance in this area and will consider the wider challenges for infrastructure investment under the existing capital allowances regime.

Double Tax Relief for Individual Members of Reverse Hybrids

The government has confirmed that it will address anomalies that arise for UK-resident individual members of US LLCs and other reverse hybrids through a new domestic foreign tax credit mechanism. This approach has been adopted in preference to the transparency model that led the consultation. Although the transparency model was supported by respondents to the consultation, the government accepted that it would require significant new technical architecture, would be unworkable for minority and indirect investors absent extensive simplifications, would raise potentially intractable CGT issues, and would deny relief to many working founders, entrepreneurs and family businesses through the proposed exclusions for single-member entities and for entities with UK residence, owner-management or a UK permanent establishment.

The credit mechanism will operate by specifying that certain entities — including US LLCs, US S-Corps, Jersey LLCs and French SCIs — are treated as opaque for an individual member, with distributions from the entities being subject to income tax at dividend rates. However, a credit against the UK tax due on such distributions will be available for eligible federal, state and local taxes, by reference to the average rate of foreign tax rather than by tracing.

A technical consultation on the detail will follow shortly. The chosen route was most respondents’ second choice and its value will turn on design detail yet to be finalised, but it will be advantageous for minority and indirect investors for whom the primary proposal raised very difficult issues. With the approach to historic periods very much remaining a live issue, earlier transparent filing positions should be kept under review.

Capital Gains Tax: New Relief for Founders

The Budget proposes a 10% CGT rate on up to £10 million of lifetime eligible gains for founders and early investors in high-growth, innovative companies. The relief is proposed to apply to qualifying disposals from 6 April 2027, with claims for the related Business Asset Disposal Relief and Investors’ Relief from that date reducing the £10 million lifetime limit. Gains on disposals of shares that do not qualify for other reliefs are currently chargeable to CGT at 18% or 24%, depending on the individual. A technical consultation on the practical operation of the relief will follow.

The proposed qualifying conditions include that:

  • The individual must have held 25% of the ordinary share capital (together with corresponding voting and economic rights) when trading, or preparations for trading, began; have held the shares or securities for at least five tax years before disposal; and have been UK resident under the Statutory Residence Test for at least five continuous tax years before the disposal.
  • The company must be within the charge to UK corporation tax, have had a substantial UK presence for the five preceding accounting periods and continue its original trade without major change. Trading conditions and sector exclusions apply.
  • The company must have at least £10 million of turnover and 15 qualifying full-time equivalent employees in the accounting period ending in the year before disposal.
  • The company must meet two of three “growth and innovation conditions”: 25% annual average compound turnover growth; at least 25% equivalent employee growth; or £1.5 million of qualifying R&D expenditure for which relief has been claimed. Growth is measured over three consecutive accounting periods within the previous 10 years, subject to minimum starting bases, and R&D claims must relate to periods ending within the previous three years.

By contrast, the Business Asset Disposal Relief (BADR) lifetime limit will be halved from £1 million to £500,000 from 6 April 2027, which will particularly affect EMI option holders on exits from high-growth companies who qualify for BADR but are not treated as founders. Shareholders and investors considering an exit should consider carefully the timing of any disposal.

Mandatory Foreign Permanent Establishment Exemption

It was confirmed that the UK’s foreign permanent establishment (PE) exemption will become mandatory for corporation tax accounting periods beginning on or after 1 January 2027 or, for companies carrying on foreign oil and gas extraction or exploration activities, from 1 September 2026.

Currently, a UK resident company with a foreign PE is by default taxed in the UK on the PE’s profits, with double tax relief often available for foreign tax paid. Since 2011, companies have been able to make an irrevocable election into the exemption, under which the PE’s profits are exempt from UK corporation tax and its losses are not available for relief against UK profits, so that in practice groups have been able to choose the treatment that suits them best. The government considers that this is being exploited, as companies can claim UK relief for overseas losses while profitable PEs elect out of UK tax.

Under the new rules:

  • The exemption will be mandatory for most UK resident companies, and the option to elect in or out will be removed.
  • HMRC proposes that losses arising before the transition date should not be available to offset UK profits arising afterwards.
  • Targeted anti-avoidance rules will apply to arrangements designed to accelerate the use of PE losses before the change, or to soften its impact through tax-driven restructuring.

Stablecoins

Following consultation, starting in April 2027 eligible stablecoins (broadly, payment cryptoassets with a stable value against a currency, backed by currency or other assets) will be taxed more like money, to support their use as a means of payment rather than as an investment asset.

  • For individuals and trustees, disposals of eligible stablecoins will be exempt from CGT, and interest-like returns will instead be taxed as savings income.
  • For companies, eligible stablecoins and related lending will fall within the corporation tax loan relationship rules, and therefore be broadly taxed based on accounting profits and losses. The withholding rules for UK-source yearly interest will extend to interest-like returns on stablecoin debts, aligning stablecoin lending with equivalent fiat currency lending.

Existing holdings will trigger transitional gains, losses or adjustments, based on market values or tax-adjusted accounting carrying values, respectively. An election will permit deferral until disposal.

Cryptoasset Loans and Liquidity Pools

From 6 April 2027, new CGT rules for individuals and trustees will align the taxation of qualifying cryptoasset loans and liquidity pools with their economic substance, generally deferring gains and losses until an economic disposal occurs and so avoiding a dry tax charge. The rules will apply in three scenarios:

  • Lending. Entering into or exiting a qualifying single-cryptoasset lending arrangement involving the same type of cryptoasset will be treated as a no-gain, no-loss disposal.
  • Borrowing. Qualifying borrowed cryptoassets will be treated as acquired at market value when borrowed and repaying them with the same type of cryptoasset will be treated as a disposal at that same value. Collateral provided will be ignored for CGT purposes.
  • Automated market-making. Contributing the relevant types of cryptoasset to a qualifying automated market-making arrangement will be on a no-gain, no-loss basis, as will withdrawal where the same types and quantities are returned. Where the quantities returned are different, a gain or loss will arise.

Modernising the Correction of Errors

From 1 April 2028, taxpayers will be under a statutory duty to correct returns and other documents sent to HMRC once they become aware of an inaccuracy. The rules will sit in a new Schedule 24A to the Finance Act 2007 and build on the existing penalty regime in Schedule 24.

A taxpayer who becomes aware of an inaccuracy must take reasonable steps to correct it, either directly or by notifying HMRC. If they do not, an originally careless or even innocent inaccuracy that has led to a loss of tax will be treated as deliberate, with the potential for significantly higher penalties and the ability for HMRC to raise assessments for the prior 20 years.

HMRC will also be able to issue Customer Correction Notices (CCNs) where it has reason to suspect an error. A CCN must identify the inaccuracy, or the type of inaccuracy, and require the taxpayer to correct it by a deadline or explain why there is no error. If the taxpayer does not comply, the inaccuracy is presumed careless, unless it was deliberate or the taxpayer can show that they took reasonable care.

Advance Tax Certainty Service: Lower Threshold

The investment-project threshold for the Advance Tax Certainty Service (ATCS) has been reduced to £300 million. The service provides a binding statement of how HMRC will apply the legislation to specified aspects of a project before the investment decision, and its scope will be reviewed after at least a year of operation.

Corporate Interest Restriction: Changes for Creative Expenditure Credits

From 1 January 2027, the corporate interest restriction (CIR) legislation will be amended to exclude Audio-Visual Expenditure Credits (AVEC) and Video Games Expenditure Credits (VGEC) from “tax-EBITDA,” the taxable earnings measure used for CIR. This corrects an omission made when the credits replaced earlier creative tax reliefs, which currently allow some groups to deduct more interest than intended.

VAT: Extending Online Marketplace Liability to UK Sellers

From October 2027, online marketplaces will be responsible for collecting VAT on sales by UK businesses that are VAT-registered or which earn more than the registration threshold (£90,000) on a single marketplace. This reform builds on the 2021 rules for overseas sellers. The proposed extension will exclude personal sales, sales of secondhand goods and business-to-business transactions.

VAT: Reform of the Reverse Charge for Overseas Services

From April 2027, the government will reform the reverse charge rules for services bought from overseas by UK businesses. The reform aims to remove a tax advantage for unregistered businesses using overseas suppliers and to simplify compliance, particularly for small businesses using overseas platforms.

Currently, UK businesses receiving supplies account for VAT under the reverse charge, with the value of such supplies counting towards the business’s registration threshold. Under the new rules, where the recipient business is not VAT-registered, the overseas supplier will be responsible for charging VAT and accounting for it to HMRC. This will increase costs for affected unregistered customers and may require overseas suppliers to register for UK VAT.

Stamp Duty Land Tax: Changes to Group Relief

The conditions for Stamp Duty Land Tax (SDLT) group relief will be narrowed by introducing a change of control test, to prevent the winding-up exception being used to avoid tax when property passes outside a corporate group.

Reforming HMRC’s Civil Information and Inspection Powers and Computer Records

HMRC’s civil information and inspection powers will be updated to allow HMRC to issue Financial Institution Notices (FINs) in respect of cryptoassets and related payments, and the statutory requirement to report annually on FIN usage will be removed, although HMRC intends to continue publishing the data. The changes will also allow HMRC to access information held in digital systems, and to request it in a wider range of formats. Existing safeguards, including the requirement that information be reasonably required to check a tax position, will continue to apply.

Addressing Persistent Noncompliance by Larger Businesses

The government will review its approach to persistent noncompliance and egregious behaviour by a small minority of larger businesses, including whether the Special Measures regime and the other tools available to HMRC remain fit for purpose.

Employee Share Schemes

Various enhancements have been announced for tax-advantaged employee share schemes.

Company Share Option Plans (CSOPs), henceforth named “EMI2”:

  • The individual limit on outstanding CSOP options will double from £60,000 to £120,000 (having only been increased from £30,000 in 2023), indicating the government’s intention to maintain the CSOP as a viable and desirable scheme once a company is no longer eligible for EMI.
  • The maximum exercise period for CSOP options will be extended from 10 years to 15 years, matching that now available for EMI options.
  • The share scheme exemptions from the disguised remuneration rules will also be extended to 15 years.

Enterprise Management Incentive (EMI) options:

  • The interaction between the CSOP and EMI individual limits will be removed, so that an option holder may hold EMI options with a grant value of £250,000, plus CSOP options with a grant value of £120,000, rather than being capped at a combined limit of £250,000.
  • The window within which EMI options may be exercised following a disqualifying event without prejudicing their tax treatment will be extended from 90 days to 180 days.
  • As announced in the Budget 2025, separate online notification of EMI grants to HMRC will be abolished for options granted on or after 6 April 2027, with grants notified through the end-of-year return. Given the difficulty of evidencing notification through the HMRC portal, this will ease compliance and simplify buyer due diligence on an exit.

As the long-awaited SIP and SAYE reforms have again not materialised, these measures signal a continued focus on equity incentives in start-up and scale-up companies, rather than the share plans more commonly used by established, and particularly listed, companies.

Corporate Tax Simplification for Business Investment

Alongside the Autumn Budget 2026, HM Treasury and HMRC published a consultation on “Corporate Tax Simplification for Business Investment,” launching a targeted, evidence-led, phased simplification programme. The paper contains no draft legislation and, in most areas, no decisions for change. However, the paper indicates HMRC is willing to listen to a wide spectrum of submissions, such as in respect of the unallowable purpose rules for loan relationships. Between November 2026 and April 2027, HM Treasury and HMRC will work with businesses through official-led working groups and roundtables to refine and prioritise the policy concerns, with detailed proposals and a final round of technical consultation to follow between May and September 2027, ahead of a future fiscal event and the publication of draft legislation. This paper has been launched in parallel with other consultations referenced below, such as those regarding corporation tax administration.

Simpler Rules for Financing and International Activity

Unallowable Purpose: Limited Response, With One Opening

HMRC has acknowledged stakeholders’ concerns regarding the subjectivity of the unallowable purpose test, the unpredictability introduced by recent case law and the resource intensity of HMRC enquiries in this area. The government has indicated its interest in exploring whether existing measures can be expanded, including through updated guidance that draws on examples from decided cases. Interestingly, the paper notes the possibility of further low-risk views (linked to the Advance Tax Certainty Service referenced above) on the application of the unallowable purpose rule.

HMRC also invites submissions on opportunities for further simplification or increased certainty, with any proposals needing to be scoped so as to be fiscally neutral and continue to provide base protection. Given the prevalence of unallowable purpose challenges in both decided cases and ongoing enquiries, scoping such submissions may prove difficult.

Treaty Relief From Withholding Tax on Interest: Consultation Continues

The government recognises the delays and burdens from the directions-based system. However, at this stage the government has promised further consultation rather than any firm commitments. Importantly, an option for self-assessment remains under consideration, although the scope of this is unclear as HMRC recognises a concern that displacing HMRC directions would reduce certainty. In the interim, HMRC will publish new guidance on operating the existing rules correctly, including on administrative failures.

Controlled Foreign Companies: Retained, With Exemptions Under Review

The Controlled Foreign Companies (CFC) rules will be retained, the government rejecting submissions that Pillar 2 renders them redundant. It will, however, consider simplifying the rules for groups within Pillar 2, in particular through aligning CFC exemptions with Pillar 2 adoption. Further overlaps with developments in transfer pricing will be considered.

Anti-Hybrid Mismatch Rules: Retained, With Potential Reform Tied to Pillar 2

The complexity and length of the UK anti-hybrid rules has long been a source of taxpayer frustration and uncertainty. Questions have been raised on whether all the existing UK rules are required, particularly those aspects that go beyond the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) recommendations or those that arguably overlap with Pillar 2. The government will maintain robust anti-hybrid rules but is prepared to consider whether all hybrids counteractions should continue to apply to groups within Pillar 2.

Corporate Interest Restriction: No Substantive Reform

The government regards the detail of the Corporate Interest Restriction (CIR) legislation as the trade-off for a regime capable of operating across a range of commercial circumstances, and has not identified any significant simplification that would avoid significant fiscal cost or compromise of the policy intentions. Business input on reducing compliance burdens is nevertheless invited.

Investment, Innovation and Intangibles

Patent Box: Rate Unchanged, Computation in Scope

No change is proposed to the elective 10% rate. However, the government accepts that computation is burdensome, particularly for smaller claimants, and will explore removing companies with income below a de minimis level from steps of the computation, the possibility of sector-specific percentages for the routine return deduction and streaming at higher levels than currently permitted.

Intangible Fixed Assets: Questions Rather Than Proposals

The Part 8 CTA 2009 regime is reaffirmed as commercially aligned and accounting-led, but the government welcomes views on simplifications regarding goodwill-like assets, partnerships and the treatment of IP licensing, cautioning that reform may involve trade-offs.

R&D Reliefs

The government proposes to consult on simplifying the R&D relief legislation, including the ERIS (Enhanced R&D Intensive Support) intensity ratio, the PAYE/NIC cap exemption and going-concern status, alongside work on the additional information form and claims process.

Reporting and Administration

International Movements of Capital: Repeal of the Separate Filing

The government intends to repeal the requirement to provide International Movements of Capital information in a separate format. However, unfortunately the focus is on the removal of the obligation, not whether the information should be provided, with the government considering whether any of the information should be provided through existing reporting channels.

Modernising and Standardising Corporation Tax Submissions and Administration

HMRC will proceed with standardising Corporation Tax computations on a longer and more flexible timetable, with a further consultation expected in early 2027 before any implementation date is set. Mandatory online filing of amended returns has also been deferred and, subject to exceptions, will apply to amendments submitted from 1 April 2028.

Businesses should expect more standardised computation content and XBRL tagging, which may require changes to tax reporting processes, systems and data collection. HMRC accepts that this could add a cost and compliance burden but has said the requirements will be proportionate and that it plans to work closely with businesses and sectors that have complex or specialist requirements.

Separately, the government has launched a Call for Evidence on Modernising the Administration of Corporation Tax, considering how technology, data and automation could shape its administration in the longer term. Businesses wishing to contribute should consider responding.

Senior tax advisor Swarnalee Naskar contributed to this alert.

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