Corporate and business taxes

Modernising the distributions framework

Following the Summer 2026 consultation on proposals to modernise various aspects of the UK taxation of distributions and repayments of capital, the government published its summary of responses alongside Budget 2026. Notwithstanding significant adverse feedback received on a number of the proposals, the government intends to proceed with all seven strands of its distributions reform package, principally affecting individual and trust shareholders. Changes are intended to apply prospectively from April 2028, after technical consultation on draft legislation in 2027.  

For non-listed companies, the government intends to limit repayments of capital following share reorganisations to the capital originally subscribed by shareholders. This restriction would apply only to reorganisations undertaken after commencement, without requiring analysis of historic share capital and share premium; listed companies would be excluded.  

To protect commercial demergers, statutory relief will be broadened, including to accommodate some onward sales, such as sales of trading divisions to third parties. Technical consultation will continue, to explore further how to reduce the areas of friction that currently deter companies from undertaking statutory demergers, including a potential replacement of the chargeable payments rules. 

For UK-resident shareholders in non-UK-resident companies, the government intends to bring certain distributions within the income tax charge and introduce a charge for stock dividends. Further extensions to the charge remain under review, although the government may instead introduce a more targeted anti-avoidance rule. Importantly, the government has responded to feedback by confirming that asset managers' co-investment returns and genuine investment returns in fund structures will retain capital treatment where it is currently available. Legislation to deliver that protection across different structures remains to be developed. Further work will address issues including the continued relevance of foreign law classification, double taxation relief and easements for smaller shareholders. This will be co-ordinated with the outcome of the consultation on limited liability companies and other reverse hybrids. 

The government also intends to clarify interactions between distributions and loans to participators, particularly where distributions are unlawful - again, the summary of responses identifies several options, with technical consultation to follow. 

The government will introduce a charge on individuals receiving loans or advances from non-UK-resident companies that would be close if UK-resident. Unlike the domestic charge under the loans to participators regime, liability would fall on the individual, not the lender. The charge would be repayable on repayment, release or write-off, with a separate charge on release or write-off of relevant loans or advances. The government is continuing to consider whether the new charges should be restricted to material participators and their associates and to non-commercial lending, and also the possible exclusion of partnership interests when measuring material interests.  

The Purchase of Own Shares rules will also be reformed, with more mechanical conditions proposed in place of the current and largely subjective "trade benefit" test. The proposed 5% minimum holding remains under discussion; the government intends to relax the requirement for employment throughout the two years immediately preceding sale and will explore allowing former shareholders to provide transitional consultancy support. It also intends to preserve genuine family-business succession and the benefits of tax-advantaged employee share and investment schemes.  

Finally, reform to the Transactions in Securities regime will proceed, with detailed proposals (including the possible inclusion of these rules in self-assessment) to follow.  

This is a very significant package of reforms, which will result in major upheaval to many well-understood aspects of the current rules. Whilst the government suggests that the package offers the prospect of more consistent treatment, its practical success will depend on whether the promised reliefs and boundaries protect commercial restructurings, investment returns and successions without disproportionate complexity. Coherence with related work, including outputs from the LLC consultation and the recent changes to the share-for-share and reconstructions anti-abuse rule, will be important as the detail develops. HMRC will engage with stakeholders in early 2027 and publish draft legislation for technical consultation, with guidance before commencement where needed.  

Foreign permanent establishment exemption

As announced on 21 May 2026, the government will introduce legislation in Finance Bill 2026-27 to make the foreign permanent establishment (PE) exemption regime mandatory. This means UK resident companies with a foreign permanent establishment (PE) will be required to exempt the profits and losses from those PEs. The changes will take effect for Corporation Tax accounting periods beginning on or after 1 January 2027 (with oil and gas companies being brought into the mandatory exemption from 1 September 2026). 

Under the current rules, introduced in 2011, a UK resident company operating abroad through a PE may make an election to exempt the profits of its foreign PEs (the foreign branch exemption). In the absence of such an election, the PE profits are subject to UK tax (subject to the provisions of any applicable double tax treaty). Where an election has not been made, the foreign losses of a UK company attributable to its foreign PE are available to be used to relieve UK profits of the main company or the wider group. Elections are irrevocable and require the company to determine whether losses were made in the years prior to the election, in which case an equivalent amount of profits must be brought into charge in the years following the election (the loss clawback rules). 

The change is designed to prevent losses attributable to such foreign PEs being utilised in the UK where foreign profits are not similarly taxed due to the foreign operations being incorporated when they achieve profitability. According to the announcement in May, the result is that "the UK Exchequer is in some cases compensating multinational groups for costs/losses incurred overseas through reduced UK tax on UK profits, without corresponding tax being collected on their foreign profits. This effect is particularly significant for groups which generate very large foreign losses or are able to claim very large amounts of capital allowances in relation to their foreign PEs, for example in the oil and gas sector." 

The announcement in the Budget is a clarification of what was already proposed earlier this year. 

Tax treatment of sovereign investment into the UK

The government is proposing to replace the UK's existing, non-statutory sovereign immunity from direct tax with a new statutory regime with effect from 1 January 2029. Broadly, qualifying foreign governments, sovereign wealth funds and other sovereign bodies would have a new "sovereign tax status". Existing sovereign investors would need to apply for that status, although the government is considering a streamlined process for those already benefiting from sovereign immunity and annual renewal is not proposed. In contrast to the existing non-statutory rules, exemption will extend to separate wholly-owned entities that are incorporated and tax resident in the sovereign's jurisdiction (eg subsidiary investment vehicles). 

The key change is that sovereign investors would generally become taxable on the same basis as other non-UK residents, except where a specific exemption applies (the policy intention is to align with international practice in exempting passive income other than real estate). In particular, sovereigns would become subject to UK tax on income from UK land, gains on direct disposals of UK land and relevant indirect disposals of UK property-rich entities, and UK trading income. UK-source interest would remain exempt, and dividends are not in any event generally subject to withholding tax under UK tax rules. The main practical impact is therefore likely to be on sovereign investors with significant UK real estate exposure or UK trading activities. 

For the newly-defined category of State-operated Overseas Pension Funds (SOPFs) the proposals are more favourable. SOPFs would continue to benefit from an exemption from tax on chargeable gains, broadly maintaining the treatment available to qualifying overseas pension schemes, and would also be treated as eligible investors in Exempt Unauthorised Unit Trusts (EUUTs). This means that, while SOPFs would sit within the new statutory framework for sovereign investors, their pension-fund character would continue to attract specific protections which are not available to sovereign investors generally. 

A number of specific exemptions and concessions are proposed as part of the new statutory regime. Sovereign investors would be treated as qualifying institutional investors (QIIs) for certain purposes, including the QAHC and NRCGT collective investment vehicle regimes. Of particular relevance for real estate investment, a sovereign investor would also be able to control or wholly own a UK REIT through a UK sovereign REIT holding company, which would be taxed at a 15% tax rate on gross property income distributions. There is also a proposed corporation tax exemption for investment management activities undertaken by a sovereign investor's UK investment office for that investor, representing an acknowledgement of the global portfolio management activity that some sovereigns undertake within the UK. 

There are also potentially important transitional rules for existing investments. Assets brought within the charge to UK tax on gains would generally be rebased to market value at 1 January 2029. The government also recognises that sovereign investors may wish to restructure existing UK real estate investments before the new regime takes effect and is proposing time-limited SDLT relief and certain corporation tax protections to facilitate qualifying restructurings. 

The proposals therefore do not amount to an abolition of sovereign immunity. They instead move to a narrower statutory exemption, with the clearest changes being to the taxation of UK real estate returns. Sovereign investors with existing UK property holdings will need to consider whether their current structures remain appropriate and, in particular, whether there is any benefit in restructuring before 2029 or using the proposed REIT treatment. Draft legislation is expected to be subject to further technical consultation before inclusion in Finance Bill 2027/28, with responses to the current consultation due by 20 January 2027. 

Bank corporation tax surcharge

The Bank Corporation Tax Surcharge is an additional charge imposed on the profits of banking companies that are subject to UK corporation tax. Under the existing rules, the surcharge is charged at 3% on surcharge profits exceeding the applicable £100 million annual surcharge allowance. 

As announced at Budget 2026, the government proposes to temporarily increase the Bank Corporation Tax Surcharge rate from 3% to 6%. The increased rate will apply for a 15-month period from 1 January 2027 to 31 March 2028, after which the surcharge rate is expected to revert to the existing rate, subject to the legislation enacted in Finance Bill 2026/27. 

Accordingly, banking companies within the scope of the surcharge will be subject to the higher 6% surcharge rate on relevant surcharge profits during this temporary period. The proposed measure does not, based on the information currently announced, change the underlying mechanics of the surcharge or the existing surcharge allowance. 

Entrepreneurs: new Founders' Relief and lower BADR lifetime limit

The government has announced that it will halve the lifetime limit for business asset disposal relief (BADR), which offers an 18% tax rate on chargeable gains for certain business disposals. BADR started life as "entrepreneurs' relief", which allowed a CGT rate of 10% on up to £10m of lifetime gains for certain business disposals. That threshold has now reduced to £500,000, meaning that BADR offers a maximum CGT saving of £30,000 for disposals on or after 6 April 2027.

The newly announced Founders' Relief appears to be a revised form of the original entrepreneurs' relief. The idea behind Founders' Relief is to target greater support at founders in high-growth UK companies, encouraging UK entrepreneurs and attracting to the UK people who want to start and scale up businesses. There is a heavy emphasis on maintaining a significant presence in the UK in order to qualify.

The (often neglected) investors' relief is also relevant to the proposed interaction between the reliefs. The new Founders' Relief lifetime limit (£10m) would be reduced by amounts claimed under investors' relief and BADR from 6 April 2027, so those claims could reduce the capacity available for a subsequent Founders' Relief claim. The consultation does not explain the reverse interaction or how competing claims on the same disposal would be prioritised, and this will need to be kept under review.

Founders' Relief in more detail

The headline rate (10%), lifetime limit (£10 million) and commencement date (disposals on or after 6 April 2027) have been announced, but the detailed design of the relief is subject to a technical consultation launched at the Autumn Budget.

Under the proposed Founders' Relief conditions set out in the consultation document, an individual must have:

• held 25% of the company's ordinary share capital, with corresponding voting rights and rights to distributable profits and assets on a winding up, when the relevant trade or preparations for it commenced;

• held such shares or securities for at least five years prior to disposal;

• been UK resident under the statutory residence test for at least five continuous tax years before disposal. 

The 25% condition could be met through a trading group's holding company. Relief would not be confined to the original shareholding or shares acquired when the company started, although the qualifying conditions must be met. Only individuals will be able to claim, and the £10m cap will apply on an individual basis (so that multiple individuals can claim in respect of the same company).

The company needs to be within the scope of UK corporation tax, with a substantial presence in the UK for the five accounting periods prior to disposal. It also needs to meet the same trading test as under the enterprise investment scheme, which is more restrictive than the trading test for other CGT reliefs such as BADR. Importantly, dealing in land and property development will not qualify and founders of such businesses will not be eligible for this relief. The company must also have generated turnover of at least £10m in the accounting period prior to disposal and have employed at least 15 qualifying full time employees in that period. This might create difficult decisions for founders when selling their businesses, if those businesses do not meet these thresholds.

In addition, the company would need to satisfy at least two of three "growth and innovation" tests. The turnover test requires annual average compound growth of 25% across three consecutive accounting periods within the ten years before disposal, starting from turnover of at least £10m in the preceding accounting period. The headcount test similarly requires annual average compound growth of at least 25% in qualifying full-time equivalent employees across three consecutive accounting periods within that ten-year window, starting from at least 15 full-time employees in the preceding period. These historical growth thresholds are separate from the minimum scale requirements immediately before disposal. 

The innovation test would require at least £1.5m of qualifying research and development (R&D) expenditure for which all conditions for an R&D tax relief claim were met, and relief claimed for that expenditure for an accounting period or periods ending within the three years before disposal. Using the existing R&D framework provides a familiar indicator, but the government acknowledges that qualifying expenditure does not necessarily produce successful innovation and that innovation can occur without it. Companies could therefore qualify through both growth tests without claiming R&D relief. Conversely, satisfying the innovation test alone would be insufficient. The consultation seeks alternative robust, objective innovation criteria as well as views on practical difficulties and unintended consequences. Given the controversy and uncertainty surrounding many R&D claims, it may be that this condition is refined as part of the consultation process.

Next steps

The consultation remains open until 30 November 2026, with early submissions encouraged to EnterpriseTax@hmtreasury.gov.uk and stakeholder meetings planned during the consultation period. Following consideration of responses, the government intends to introduce Founders' Relief through amendments to Finance Bill 2026/27 for the announced 6 April 2027 commencement. The final definitions, information obligations and compliance safeguards will determine how readily the intended benefit can be accessed in practice.

Capital allowances and pre-development costs consultation

The Autumn Budget announced that the main rate first-year allowance will increase to 50% for expenditure incurred on or after 1 January 2027. The main rate writing-down allowance will decrease from 14% to 12% from 1 April 2027 for corporation tax and 6 April 2027 for income tax. These changes will be included in the Finance Bill 2026/27. 

The government has announced the next steps following the closure of the consultation on pre-development costs. It will be recalled that as part of the Autumn 2024 Budget the Corporate Tax Roadmap committed to consulting on the tax treatment of pre-development costs. This topic was further brought into focus by the recent Supreme Court decision in Orsted v HMRC in 2026 where very significant amounts of capital expenditure on studies and surveys for an offshore wind farm were denied tax relief under the capital allowances regime on the basis that they did not have a sufficiently close connection with the plant and machinery that was ultimately generated from the studies and surveys.    

As a result of the uncertainty as to the boundaries of existing legislation allowing tax relief for pre-development costs and the Orsted decision which leaves taxpayers in a similar position to Orsted with very significant "tax nothing" capital costs on large infrastructure projects, the government is committing to provide greater clarity on the current tax treatment of pre-development costs. It will also explore whether further changes can be made to existing guidance to clarify what existing capital expenditure might qualify for capital allowances within the framework of the existing legislation. The government says it may also consider introducing new legislation to provide for additional clarity on what capital expenditure may qualify for tax relief. 

There will be further engagement with interested parties in due course once the government has considered its options.                        

Introduction of the side-by-side package

Budget 2026 confirmed that the government will introduce legislation in Finance Bill 2026-27 to amend the Multinational Top-up Tax and Domestic Top-up Tax rules to implement the OECD's Side-by-Side package, alongside further technical amendments intended to ensure that the UK Pillar 2 rules operate effectively. 

The Side-by-Side package will take effect for accounting periods beginning on or after 1 January 2026. Most of the technical amendments will apply for accounting periods beginning on or after 31 December 2026, although taxpayers will be permitted to elect for these amendments to apply from an earlier date. Certain other technical amendments will apply for accounting periods beginning on or after 31 December 2023 or 31 December 2024, depending on the relevant provision. 

Practical impact. Groups within the scope of the UK Pillar 2 regime should assess the impact of the Side-by-Side package on their Multinational Top-up Tax and Domestic Top-up Tax positions and determine which of the technical amendments apply to their relevant accounting periods. Groups should also consider whether electing for earlier application of the relevant amendments would affect their Pillar 2 calculations and compliance position. 

Oil and Gas Revenue Levy  

The Autumn Budget confirms the framework for the Oil and Gas Revenue Levy (OGRL), a permanent, revenue-based levy to replace the existing Energy Profits Levy (EPL) once it ends. The OGRL will commence immediately after EPL ends, either on 31 March 2030 or earlier if the Energy Security Investment Mechanism (ESIM) is triggered, with no overlap between the regimes. This follows the announcement of the government's intention at Autumn Budget 2024, a design consultation in spring 2025, publication of the consultation responses at Budget 2025 and further stakeholder engagement in 2026.  

The OGRL will apply to companies carrying on a ring fence trade where the realised price of oil or gas exceeds the published threshold with liability calculated by reference to the excess above that threshold. The OGRL will be charged at a rate of 35% on revenues from oil and gas sales above thresholds currently set at $90 per barrel for oil and 90p per therm for gas, adjusted each financial year by reference to CPI. Prices will be averaged over monthly reference periods to determine whether the thresholds are exceeded. The OGRL will only apply to revenues from the sale of oil and gas and other ring fence income will be excluded. The levy will be a standalone charge, additional to Ring Fence Corporation Tax which is charged at 30% and the Supplementary Charge which is charged at 10%, with no group relief, loss carry-back or loss carry-forward, and no deduction for OGRL in calculating profits for other taxes. Transactions must be allocated to monthly periods on a consistently applied, fair and reasonable basis. Administration will follow the existing Corporation Tax and ring fence framework, including the instalment payments regime for large ring fence companies. 

Exploration and exploitation rights to be treated as immovable property 

Budget 2026 confirms a legislative change to treat exploration and exploitation rights relating to activities in the UK or on the UK Continental Shelf explicitly as immovable property.  

Currently, certain contractual rights fall outside the intended scope of the UK's taxing provisions due to the interaction with the UK's tax treaties, with this position confirmed by the UK Supreme Court in the Royal Bank of Canada case. This legislative change is intended to address this interaction and ensure the framework operates as intended by HMRC. 

The change will result in profits arising from certain rights connected with the exploration or exploitation of natural resources being deemed to be income from immovable property where the rights derive their value from, or are used in connection with, land or natural resources. The change will apply for accounting periods beginning on or after 13 July 2026 for corporation tax and to profits arising from 6 April 2027 for income tax.

Lease and leaseback anti-avoidance

Under existing capital allowances anti-avoidance provisions, in circumstances where the lessee treats the leaseback as an operating lease even though the lessor treats it as a finance lease, s.228G Capital Allowances Act limits the tax deductions the lessee would otherwise receive (both capital allowances and full deductions for the rental payments as an operating lessee) to the interest cost on the basis that under generally accepted accounting practice, the lessee should account for the leaseback as a finance lease.

The relatively recent changes to accounting leasing standards brought the treatment of operating leases (right of use leases) into line with finance leases so lessees would now effectively account for assets and liabilities under the lease on balance sheet. However existing s.228G Capital Allowances Act does not catch the lessee where the leaseback is now accounted for as a right of use lease under new accounting standards.

A new proposed revision to s.228G Capital Allowances Act will correct the position to ensure that a lessee under a right of use lease will be required to determine whether the lease would be accounted for as a finance lease under generally accepted accounting practice. This will effectively limit the lessee's tax deductions. The measure will have effect for periods of account beginning on or after 28 October 2026.

Research and development tax reliefs 

The government will introduce legislation in Finance Bill 2026/27 to remove the requirement to submit a Claim Notification Form for R&D claims made on or after 1 April 2027. The Claim Notification Form is the process of letting HMRC know that you intend to make a claim for R&D tax relief. It was a requirement for first-time claimants and for those that have not claimed in the last three years.  

They will also simplify and rationalise the information required in the Additional Information Form for companies that claim R&D tax relief from autumn 2027.  

The changes follow a series of reforms of the R&D tax regime by HMRC in recent years to improve the operation of the regime for taxpayers and mitigate R&D tax fraud.