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Tax Bite – Autumn Budget 2026: Part 2

You will have seen our note on Thursday looking at the two key CGT changes from the Budget, being a reduction in the BADR limit to £500k (from 6 April 2027) and the proposed introduction of a new “Founders’ Relief” from that date also. As we said, the conditions for that new relief look very restrictive and it is hoped that the consultation process (which ends on 30 November 2026) will result in some relaxations. Otherwise very few people will actually benefit. We will submit our concerns to the consultation process. Some of the key concerns are:-

• The very strict turnover test - £10 million and then 25% compound growth for 3 years;
• The fact that the trade must be the same from the start – entrepreneurs with an idea may often pivot that idea as the business progresses and it seems odd to penalise those people or force them into starting again in another company (and there might be rules against that anyway);
• Applying the test only to people with 25% at the very start – someone who comes in just after the trade has started but makes a huge contribution will be excluded.

For anyone who would qualify it may certainly be worth tipping deals into the next tax year (commercial considerations aside) as the relief can save £1.4 million, although that would be at the expense of other colleagues who have BADR but not Founders’ Relief. However, until we see the legislation nobody will know for sure that the relief will be relevant to them.

Company distributions – a new framework from April 2028

The government is going ahead with its reform of the taxation of distributions and repayments of capital from companies. Draft legislation is expected in 2027, with the new rules taking effect from April 2028.

This is potentially the most significant change for owner-managed businesses in the longer term, as it could affect share buybacks, capital reductions, liquidations, demergers and other ways of returning value to shareholders. There is nothing to do yet, but clients considering any form of demerger should get on with it under the current rules as from April 2028 it is likely not to be possible to demerge and then sell in the medium term. In addition, conversations with clients about their choice of business structure may need to change. It has always been the case that a business owner may start a new business within an existing group so as to use early-stage losses against the established group’s profits. With the arrival of a new regime where demerging before a sale is likely to be impossible, it may be best to start off the new business as a separate sister company.

Employee share schemes – EMI and “EMI2”

The Company Share Option Plan (CSOP) will be known as Enterprise Management Incentives 2 (EMI2), although the legislation will keep the CSOP name. From 6 April 2027:

• the EMI2 individual option limit doubles from £60,000 to £120,000;
• the interaction between the EMI and EMI2 individual limits is removed, so an employee could in principle hold £250,000 of EMI options and £120,000 of EMI2 options;
• the maximum period for exercising EMI2 options with tax advantages increases from 10 to 15 years;
• the window for exercising EMI options after a disqualifying event is extended to 180 days;
• the EMI exception for Employee Ownership Trusts (EOTs) is extended meaning that companies can still grant EMI options even where there are arrangements to come under the control of an EOT;
• separate notifications of EMI option grants are replaced by reporting through the annual return, for options granted on or after 6 April 2027.

These changes build on the increase in the EMI company limits to gross assets of £120 million and fewer than 500 full-time employees, which has applied since 6 April 2026. Companies should check whether their existing scheme rules and option agreements need updating to take advantage of the longer exercise periods. Higher-value companies will now have more flexibility to continue granting options within the revised limits before having to resort to other means such as growth shares.

Personal tax points for owner-managers – profit extraction

The new higher savings tax rates may well encourage business owners to leave funds in the company and invest them there. This was always a potential concern for BADR but once that saves you only £30k this is less of a concern (unless you are one of the lucky few who could benefit from Founders’ Relief). Those who own property that is rented to their company may be even less likely to charge rent. Getting relief at 25% in the company for personal income at 49% is really not appealing.

Venture capital schemes

There will be minor but very welcome technical fixes to SEIS, EIS and VCT rules which will generally take effect from 6 April 2027, and the government will engage with stakeholders on improving the Advance Assurance process. Any such improvements will be welcome to those whose clients use any of these reliefs, as they are notoriously difficult and easy to mess up. We will tell you more when the detail arrives, but so far announcements include:-

• SEIS and EIS or VCT investment to be able to take place on the same day – a welcome change as companies and some advisers have sometimes messed up SEIS through not being aware of the rather strange rules;
• amending the VCT rules to ensure any withdrawal of Income Tax relief is calculated using the rate that applied when the shares were issued.

Correcting errors

From 1 April 2028, taxpayers will be under a general obligation to correct inaccuracies in returns once identified, and HMRC will be able to issue Customer Correction Notices. We will provide more details on this in due course as this development could have an impact on deals, i.e. buyers will potentially become more concerned about having to disclose identified tax errors to HMRC rather than relying on indemnities.

If you have clients who are planning an exit, a reorganisation or a new share scheme over the next 18 months, or who think they might qualify for Founders’ Relief, please do get in contact.

This Tax Bite is based on the Budget documents published on 28 and 29 October 2026. Many of the measures are subject to consultation and draft legislation, and specific advice should be taken before acting.