In this episode, we look at the implications for individuals and businesses, from the reform of inheritance tax to changes to capital allowances.

Host

• Stephen Relf, Technical Manager, Tax, ICAEW

Guests

• Richard Jones, Senior Technical Manager, Business Tax, ICAEW
• Katherine Ford, Technical Manager, Personal Tax, ICAEW

Producer

• Ed Adams

Transcript

Stephen Relf: Hello and welcome to the Tax Track, the podcast series from ICAEW, exploring the latest developments in the world of tax. The Finance Bill was published in December 2025 and is currently making its way through Parliament. Set to be the longest Finance Act in almost 10 years, it impacts on almost all areas of tax, causing significant challenges for taxpayers and agents. In this episode, we'll discuss some of the key measures from the Finance Bill. For individuals, the changes include reforms to inheritance tax and in particular to the reliefs for agricultural and business property where the government recently made further concessions.

Catherine Ford: The original proposal was that it would not be transferable between spouses; that has also changed for the better.

SR: And for businesses, we'll explore the impact of changes to capital allowances, including the introduction of a new first-year allowance and a reduction in the main rate of writing-down allowance.
Richard Jones: For those who have been suffering for a number of years, this will be some welcome relief.

SR: I'm Stephen Relf, a technical manager for tax at ICAEW. Today I'm joined by two colleagues from the Institute's tax team, both of whom you will recognize from previous episodes. We have Catherine Ford, Technical Manager for Personal Taxes, and Richard Jones, Senior Technical Manager for Business Tax. Welcome to you both.

CF: Hello.

RJ: Hi there.

SR: Before we get into the detail, please do remember to look to the show notes for links to further information. This includes articles and a tax guide that provides a summary of all the Finance Bill measures.

SR: Catherine, let's start with inheritance tax and the reform of APR and BPR. Can you remind us, please, what's changing?

CF: So previously, the reliefs for APR and BPR were unlimited. As of April 2026, which is only a few months away now, we are moving to a rate of 100% relief up to a £2.5 million cap, and after that, there will be 50% relief above that. The allowance is going to be transferable between spouses, so that will mirror what we have for the nil-rate band and the residential nil-rate band. And if you have clients with shares listed on AIM, for example, the Alternative Investment Market, the default rate of relief will now be 50% on those shares going forward.

SR: So this policy has been controversial from its very beginnings, hasn't it? But the government has made concessions of late?

CF: It has; it’s been very controversial. Obviously, there's been a lot of protests from the farmers, but unfortunately, awareness amongst business owners is actually still quite low and they are affected too. So originally the limit was going to be £1 million, which really doesn't go very far for any viable business. So at least it is now £2.5 million. And the original proposal was that it would not be transferable between spouses; that has also changed as well for the better. And the final measure that was changed was that there will be indexation of the £2.5 million allowance from 6th of April 2031.

SR: So some significant changes then. And I know ICAEW's been quite active in pushing for changes of this nature. You've been involved in that?

CF: Yeah, so we've submitted three sets of representations to Parliament on these measures and I was also fortunate enough to be able to give evidence on behalf of ICAEW to the House of Lords' Finance Bill Sub-Committee as well. And it's very much been a collective effort across the professional bodies.

SR: So is it fair to say that we're happy with where this has ended up, or is there still more that could be done?

CF: I think the £2.5 million was probably the biggest change, and that and the spouse transfer were the biggest changes we'd pushed for, so at least we have got those now. There are still plenty of other measures that we'd like to see improved. So one of them is a potential tapering of lifetime gifts made between 30th of October '24, when these measures were announced, and the 6th of April '26, for those who are elderly, other people who have for whatever reason a short life expectancy, or people who lack legal capacity to change their wills, because lifetime planning for them isn't an option.
There's also a proposal we'd like to see implemented if a business is retaining cash to fund a future inheritance tax liability of an owner, that that cash will not be treated as an excepted asset for BPR purposes and therefore excluded from BPR. Also extracting monies from a company will be a problem because you're potentially looking at a double charge, either as a dividend or some sort of capital extraction. So we'd like to see the company purchase of own shares provisions extended. Currently, you can only pay IHT using a company purchase of own shares for two years from death, but we have a mismatch with 10 years of installment payments there. And the final measure really is probably more valid for trusts, who make a lot of capital distributions within each 10-year cycle, would be to get some clarity on how long a valuation will be valid for.

SR: Okay, so some good news then in that the government has listened, but perhaps there is more the government could do to make this land better?

CF: Exactly.

SR: Now, if we stick with IHT, because obviously the government are interested in reforming IHT, and we've concentrated on APR and BPR, which has had most of the headlines since it was announced, but there are other changes to IHT, aren't there?

CF: There are. So from 6th of April 2027, there are two things happening. Firstly is the digitalization of inheritance tax. Now at the moment, there isn't really any software for inheritance tax; it tends to be done via solicitors' sort of case management software, but with paper returns done, so it's a very manual, clunky process at the moment.
And then we also have inheritance tax coming in on pensions. So unused funds and death benefits will be liable to inheritance tax from April 2027. The process is going to involve quite a lot of information exchange between the personal representatives of the deceased and the pension scheme administrators, because the nil-rate band has to be shared across all pension pots and the estate pro-rated, so there's going to be quite a lot of information exchange needed there. Now the measures have changed a little bit. The current proposal is that the personal representatives are primarily liable for paying the inheritance tax, but there is now a mechanism where they can instruct the pension scheme administrators to withhold up to 50% of the pension pot for up to 15 months and to pay that to HMRC.

SR: So I know this is another area where ICAEW have had concerns. Now you've mentioned that some changes again have been made. Where are we now with this? Are we in a better place with it?

CF: We are in a better place, but again, there are still plenty of areas where it could be improved. So paying inheritance tax within six months of the end of the month of death has always been a problem and it will continue to be a problem now because of the information exchange between the pensions and the personal representatives. The way that the value is worked out for inheritance tax, there will be no APR or BPR on the underlying assets held within a pension. So if you've got company's trading premises or if you've got farmland held in a pension pot, those will not qualify for APR or BPR, and there's also at the moment no fall-in-value relief for those underlying assets in the same way that there currently is for shares and land. Pension funds are concerned about how they will raise the cash if they're instructed to pay the IHT by the personal representatives where there are illiquid assets in a pension, for example, property. You don't really want a fire sale of a commercial property. There's also another problem. So in the UK at the end of 2024, there was a study saying there were around 3 million forgotten pension pots in the UK, and it's probably not going to be unusual over the course of somebody's working life to have 10 or more pension pots if you change jobs every three or four years. And every time a new pension comes to light throughout the estate administration process, it means that the nil-rate band calculation gets reworked every time as to how it's spread between all the different pots. So that's going to cause real problems as well.

SR: So clearly there's an awful lot going on with IHT, not just the year to come but in future years as well.

CF: Yeah, we're still being very active in the background trying to push the government to make improvements, so watch this space.

SR: Yeah, I'm sure we'll come back to that again in future episodes. Just finally on individuals as well, we did get some changes on income tax, didn't we, at the budget?

CF: Yes, we did. There's a two percentage point increase on basic and higher rates of dividends from 6th of April 2026. So basic rate will now be 10.75% and the higher rate will be 35.75%. There's been no change to the additional rate. The message we had on that one was it was felt that with the combined corporation tax rate and rate of tax on dividends, it potentially made the UK a bit uncompetitive internationally. They may change that I guess in the future.

SR: Okay, so those rates always seem low, don't they, in terms of the normal rates, but as you mentioned there, the dividends come out of after-tax profits so it does factor in corporation tax as well. And am I right in thinking there's also changes for savings and property income?

CF: Correct. So from April 2027, the rate of tax on all savings bands will go up by two percentage points, so 22% basic rate, 42% higher rate. And you might think at the moment that you can allocate your personal allowance in the most beneficial way, so let's just allocate our personal allowance to those savings and property incomes that will be taxable at 22%. Unfortunately, the government has already thought of that and they are actually changing the ordering, so the legislation will now set out that you have to use your personal allowance against your non-savings non-dividend income first, then it will go against the other rates in order. So just one to watch out for.

SR: Yeah, there's definitely some thinking still to be done, isn't there, especially when it comes to the property income and including I guess the interaction with other parts of the UK, Scotland and Wales?

CF: Yeah, so Scotland is not changing its rates of income tax but it's changing the thresholds at the lower end of the scale as well, the idea being to save people more tax in those lower tax brackets.

SR: Now before we move on from income tax, I think we also have to mention what isn't changing, because obviously the big story from the budget last year was the continuation of frozen allowances and thresholds, and that's going to present problems for the tax system, isn't it?

CF: It is. So the personal allowance and the higher rate threshold are now frozen until April 2031, which is still another five years away, which is quite something. And there's a problem with the state pension. The state pension starting from April 2026 is currently only about £30 below the personal allowance and is expected to go over the personal allowance from April 2027. That potentially then brings more state pensioners into having to do tax returns or be issued with simple assessments. The government has said that where a pensioner's only income is their state pension, they will not be expected to pay the tax that falls due once it exceeds the personal allowance. What that looks like, we don't know yet.

SR: Yeah, lots of potential complications around that, isn't there? Thank you for that, Catherine. So let's now move on to business taxes with Richard. The government set out its stall very early with its corporation tax roadmap that promised stability, ruled out significant changes. Has the government stuck to the roadmap?

RJ: Yeah, broadly speaking it has. We've got no change to corporation tax rate, which is good, and equally, you know, big regimes like the R&D tax relief, again we haven't seen any change since the merged scheme from the previous year. But there was a surprising change to capital allowances. In fact, there were two changes: one of them was introduction of a new 40% first-year allowance on expenditure from the 1st of January '26. And then there was also a reduction in the main rate of writing-down allowances for the general pool, going down from 18% to 14% from April of this year as well.

SR: Yeah, it's quite a surprise to see the new first-year allowance because we already have generous accelerated capital allowances—the annual investment allowance, the full expensing. So why do we need another one?

RJ: The main reason why this is coming in is to help out the leasing industry. So the leasing industry has been lobbying for a number of years now to get better allowances for assets that are acquired to be leased out to third parties. The reason being that they generally don't qualify for the kind of first-year allowances that are otherwise in the Capital Allowances Act. So this is primarily to help that industry. However, there are also other types of business that will benefit. So for example, if you're an unincorporated business like a sole trader or a partnership, you're not currently eligible for full expensing; that's only available for companies. So that will benefit that type of business, but we also have the annual investment allowance which is worth a million pounds, so if you have a business with capital expenditure that doesn't exceed that, then equally the new allowance isn't going to be necessarily that much of a help to you. Having said that, the AIA isn't available to partnerships with corporate members and this has been one of the problems for those types of partnerships really since the AIA was introduced. So this is going to help those forms of partnerships as well. So I guess in summary, the vast majority of businesses aren't going to see any benefit from this new first-year allowance, but for those who have been suffering for a number of years, this will be some welcome relief.

SR: So this measure wasn't entirely unexpected because the roadmap had talked about plugging gaps in the first-year allowance system, especially for leasing. So we kind of thought something was coming. But I think the cut in the writing-down allowances, that was unexpected, wasn't it?

RJ: Yeah, I mean I think to large extent it's to help to pay for the 40% first-year allowance. It was presented as a complete measure in the budget notes and you can see that at least in the short-to-medium term it is actually bringing in more revenue than it's deducting. Obviously, a writing-down allowance is a timing issue, so possibly in the longer term that advantage to the exchequer will fall away, but certainly for the next few years, it looks to be a way of paying for that new allowance.

SR: It's good news and bad news for business in a way. Some businesses will benefit from the first-year allowance, some businesses will lose out from the cut in writing-down allowances, and that very much depends on the taxpayer's circumstances. But this does very little to simplify capital allowances as a whole, does it?

RJ: Yes, and in a way, maybe it even complicates because we've got yet another first-year allowance, and that's one of the things that there are—if you look at that part of the Capital Allowances Act, there's a whole raft of different forms of first-year allowance, and so there's certainly a lot of room there for simplification if the government were minded to have a look at that.

SR: So one area that the government did look at at the budget, we did get some changes to capital gains tax, CGT relief, for businesses and business owners, starting with the change for employee ownership trusts, EOTs?

RJ: Yes, that's right. There had been a few changes over the last couple of years, which were more tinkering around the edges, but this one is very much a change to the fundamental rule. And the fundamental rule of an employee ownership trust is when you have an individual that sells their shares into a trust that set up for the benefit of the employees. Previously, prior to budget day, the whole of the gain, if there was a gain arising, was held over, so there would be no immediate tax charge. But that would fall due if those shares were then disposed of by the trust. So that was the position up to budget day. Going forward, only 50% of that gain will be held over. Now it's worth mentioning that the gain won't qualify for business asset disposal relief, which used to be called entrepreneurs' relief, or investors' relief, but still, it gives you a better effective tax rate. So if you imagine for higher or additional rate taxpayers it's 24% currently CGT, so divide that by two and you get 12%, compared to 14% chargeable on gains that are covered by BADR. Having said that, it doesn't use up your lifetime limit of BADR. So actually that means that you've saved a certain element of your future gains to be taxed at that 14% or whatever rate it is in the future when that comes to charge. In a way, it's swings and roundabouts. The other thing to mention is of course that if only 50% of the gain is held over, that means that only 50% of the gain arising on the trust when it comes to dispose of the shares. So once again, in a way, this is perhaps a better position for the trust.

SR: It's an interesting comparison there you draw between the position when you sell to an EOT and just BADR in a normal gain. So the actual difference in percentage points isn't great, it's only two percentage points, but as you say there's no lifetime limit for the EOTs. And there are some other advantages there as well. So do you think that although this removes or lessens some of the benefits of an EOT structure, there are still benefits there, this still will be used?

RJ: In a way, it's a way to move benefit of the company out of existing shareholders' hands and into employees. So there'll always be, for those individuals who perhaps are looking to make an exit and who want to involve employees in some way, then this will continue to be an attractive route.

SR: And another surprise change then was to the already complicated rules around share exchanges and reconstructions, which I believe took effect from budget day. Can you quickly talk us through those?

RJ: Yes, so just very quickly just in terms of what the treatment is. So again the rules are complicated and there are lots of qualifying conditions, but assuming you meet all those, if you dispose of shares as an individual and you acquire new shares in a new company in consideration, then essentially any gain that would have arisen is rolled over into the base cost of the new shares. So that means that there's no immediate tax charge, which is good. But of course, that's a tax benefit and HMRC don't want to give that to everyone if they're not entitled to it, or at least HMRC don't believe they're entitled to it. So they've taken a number of cases to court and they've lost a couple of them recently. Now the reason why they weren't able to counteract additional avoidance steps that were taken in those cases was because overall when you looked at the overall transaction, it was held to be a commercial transaction, even though there were sort of some add-ons that gave an even better tax position.So what that means is that the new rules are moving away from a commercial purposes test and instead we've now got a rule which says that HMRC can counteract arrangements where the main purpose or one of the main purposes is to reduce or avoid liability to tax. So crucially that now means that even if that little part of the overall picture is actually part of a bigger picture which is still commercially driven, then that's not going to be able to get you out of it. HMRC can go in and nitpick about individual elements and disallow those elements.

SR: So this is likely to have an adverse effect for some businesses and business owners in that case?

RJ: Yes, because potentially let's say you had a number of different shareholders and one or a small number of them take part in this planning, then HMRC could go after those people as opposed to others that didn't. So whereas previously you've kind of had a blanket treatment for everyone, now HMRC can apply the rules on a more discretionary basis. There also used to be a safe harbor for shareholders with less than 5% of ordinary share capital and that's being removed as well. So now any individuals with a smaller shareholding can't rely on that, unfortunately.

SR: As we know, a lot of the burden of complying with these rules falls on agents to give advice, and this is really going to complicate that process, isn't it, for agents?

RJ: Yes, that's right. The clearance applications that advisors will typically put in in order to give certainty for their clients will need to be a lot more detailed. They'll have to go into much more about the various steps of the arrangements because obviously, a clearance is only valid to the extent that you've given full and complete information. So if HMRC find that there's information that's been withheld, then they won't honor that clearance. It's also worth saying therefore then that having a strong commercial purpose for the arrangements overall isn't going to be sufficient. Having said that, although these rules are being changed for capital gains tax, there will still be a commercial purposes test for other parts of the legislation that could still apply to the same transaction. So for example, stamp duty or intangible assets rules. So what you might end up with is having to prepare two different types of clearance application for the different areas of the legislation, which is going to make things a little bit complicated. Now we have made representations to Parliament about this; we don't know obviously whether that's going to have any impact, but let's wait and see as the Finance Bill continues its way through Parliament. The last thing to say is that if you've previously had a clearance under the old rules and you were given that before budget day, if your transaction hasn't completed, you now can't rely on that; you'll need to get a new clearance under the new rules.

SR: So I think this is a good example of a challenging area made more challenging. So I think all agents who are involved in this sort of planning, we do have an article published in Tax Line which goes through this in a lot of detail, it's linked through from the show notes, so please do look at that.

SR: Now obviously we've focused on the Finance Bill and we'll stick with businesses, but let's talk about some measures that are not within the Finance Bill but will probably have a big impact on business. And that's around business rates, non-domestic rates, where I think we're expecting a lot of changes, aren't we, Richard, from April this year?

RJ: That's right, and that's both in England and in Wales. So every nation of the United Kingdom has different business rates systems. So if we start with England, first of all, we've had relief given to retail, hospitality, and leisure businesses, often just reduced to RHL, and they have been in place since the COVID lockdowns. So they are basically going, and in their place, we've got 5p lower multipliers applicable to the rateable valuations for properties that are used in those businesses. If you combine that with changes to the multipliers generally speaking and also new valuations applying from April 2026, you can see there's going to be both winners and losers in this situation. So what I would really urge businesses to do is go in and have a look at their new valuation, look at what their new rates are going to be, because they could be significantly different to what they were paying before, and use that information for their financial forecasting, in helping them to decide what investment decisions they might want to make, because this might be a bit of a surprise for them. One area that has seen a particularly difficult situation is the pub industry, and a couple of weeks ago the Chancellor did announce that the government was going to be looking at measures to provide some other form of relief. We haven't seen the details of that, so perhaps it will be by the time this podcast comes out, but certainly for the time being we're waiting to see what that looks like. I'll just very quickly mention the changes in Wales because they're a little bit less complicated. So from April 2026, we've got three new multipliers: so there's a retail multiplier—so that applies to shops with rateable value below £51,000; there's going to be a higher multiplier for properties with a rateable value above £100,000; and then a standard multiplier. So again there's going to be winners and losers in that system, but there's also going to be a transitional relief. So for any business whose rates have increased by more than £300, that will be phased in over a number of years, so that at least provides some form of relief for those businesses that are most affected.

SR: So that's an awful lot of change to be aware of coming up from April, and as you mentioned we may get more changes announced in the coming weeks as well. But even looking further ahead, the government has a long-term plan to reform business rates, so again a year, couple of years' time, we're going to see even more significant changes?

RJ: The government published a call for evidence on budget day and that set out a number of proposals, and what the ask is in the call for evidence is for examples to support the case for introducing them. Now at present, none of the changes look particularly fundamental, and certainly, in our response, we'll be asking for the government to be more ambitious in its proposals. But I'll very quickly talk you through some of the ideas that were included in the call for evidence. There is an article actually on this where my contact details are on because we're asking members and listeners if they have any evidence that could help to support our response to the call for evidence, then we'd love to hear from them. But very quickly then – first of all, improvement relief: The government's looking possibly to make that more helpful to businesses that are carrying out improvements on their properties, so they're asking for examples where either that relief or the business rates system in general has had an impact on decisions to make improvements to properties or other investment. They're potentially moving from a slab to a slice basis. This is where you move up from having the small multiplier up to the standard multiplier applying to you. What they're looking to do is something a bit like income tax or SDLT where you only pay the certain rate on the amount that's above a threshold. So they're asking for examples there of where the current system is having a particularly detrimental effect. The next area is empty property relief. So this is primarily applicable to landlords who are holding on to properties that aren't currently being rented out. So the government wants to make sure that that is available to those who need it, but also it's really conscious of the fact that that relief has been used and is being open to abuse, so they want to optimize that to make sure it's benefiting those that need it whilst making sure that abuse is closed down. And then finally, there are various different ways in which rates valuations are calculated, and one of them's called the receipts and expenditure method. This mainly applies to really quite unusual properties where there isn't much information about comparable properties being rented out—so places like airports, theme parks that obviously, you know, they're very unusual, and so what happens there is that it's based on an income in and income out basis. But that can create a lot of uncertainty for those sort of businesses, so the government wants to hear about any difficulties that that has been causing.

SR: So that's an awful lot of change to be aware of coming up from April, and as you mentioned we may get more changes announced in the coming weeks as well. We'll keep you up to date on business rates changes and any amendments to the Finance Bill as it works its way through Parliament through our tax news service. That's it for this episode. Many thanks, Richard and Catherine, for your contributions.

CF: Thank you.

RJ: No worries.

SR: And thank you for listening. All of the topics we've discussed today are covered in more depth in the articles linked in the show notes. If you've found this useful, then don't forget to subscribe so you never miss an episode. You can rate and share the podcast too. We'll be back next month with the next Tax Track. In the meantime, why not check out the sister podcasts from ICAEW: Accountancy Inside and Behind the Numbers—the latest in business and accountancy news and analysis with me, Philippa Lamb, and expert guests. And there's also the Students Podcast aimed at young professionals. If you're not already a member of ICAEW's Tax Faculty, remember that institute members can join the faculty for no additional cost. Faculty members receive our monthly Tax Line bulletin. In addition, anyone can subscribe to receive our weekly Tax Wire newsletter containing the latest news from ICAEW. Thank you for listening.