In part one of this series looking at the key changes to UK tax legislation which took effect due to the commencement of either the new Financial Year 2026 from 1 April 2026 or the new tax year 2026/27 which began yesterday, April 6, we focused on Making Tax Digital (MTD) for Income Tax and measures affecting tax agents. In part two we take a look at key changes to the capital taxes, income tax, corporation tax, and capital allowances.
Inheritance Tax (IHT) Reliefs
From 6 April 2026, 100 percent IHT relief for both Agricultural Property Relief and Business Property Relief are capped at a combined £2.5 million allowance per individual. Qualifying agricultural and business assets that exceed this threshold now receive 50 percent relief, resulting in a potential effective IHT rate of 20 percent (40 percent IHT rate x 50 percent unrelieved).
However, each individual’s £2.5million allowance, or any amount of this which is unused, is transferable between spouses and civil partners, which essentially then can provide 100 percent relief on qualifying assets worth up to £5 million.
This significant policy change was announced in the 2024 Autumn Budget and has been the subject of much criticism. Since that announcement, Chartered Accountants Ireland has consistently lobbied the UK government for a range of mitigations to the original policy which culminated when our UK Tax Manager, Leontia Doran, delivered oral evidence last October to the House of Lords Finance Bill Sub-Committee inquiry into these changes which you can view on parliamentlive.tv (4.55pm onwards).
Business Asset Disposal Relief (BADR) and Investors’ Relief (IR)
As a result of the increased rates of CGT which took effect from Autumn Budget Day on 30 October 2024, BADR and IR, which previously provided a reduced 10 percent rate of CGT on qualifying business disposals, increased from 10 percent to 14 percent from 6 April 2025. Both have now further increased to 18 percent from 6 April 2026. The lifetime limit (LL) for each remains unchanged at £1 million.
As a result of the increase to each of these, their benefit has now been reduced to a saving of 6 percent compared to the maximum CGT rate of 24 percent, or £60,000 if the individual’s full LL is available on the relevant transaction.
Dividend income tax rates
To more closely align the rates of income tax on passive income with earned income, the dividend income tax rates increased for basic and higher rate taxpayers by 2 percent from 6 April 2026. The basic rate rose from 8.75 percent to 10.75 percent, whilst the higher rate increased from 33.75 percent to 35.75 percent. There is no change to the additional rate, which remains at 39.35 percent, nor has there been any change to the £500 dividend allowance.
Although dividends generally continue to be more tax efficient as a form of cash extraction from a company compared to employment income, this increase reduces the tax benefit and therefore necessitates a fresh review of company profit extraction strategies.
Corporation Tax (CT)
The flat rate CT late filing penalties doubled from 1 April 2026 (the associated tax geared penalties for late filing are unchanged). These are now as follows for late CT returns:
- Up to three months late: £200 penalty increased to £1,000 for the third consecutive late return, and
- More than three months late: £400 penalty increased to £2,000 for the third consecutive late return.
Although the rates of CT are unchanged in the Financial Year 2026, the increased higher rate of dividend tax has resulted in an associated increase in the rate of Section 455 tax which is payable by companies on loans to participators/associates of participators. This has therefore now increased to 35.75 percent.
Other changes to CT, which took effect for accounting periods beginning on or after 1 January 2026, include:
- The exemption of UK-to-UK transactions from transfer pricing if there is no risk of tax loss,
- Changes to the definition of ‘permanent establishment’ to align with that of the OECD’s Model Tax Convention, and
- The repeal of the diverted profits tax which has now been replaced with a new charging provision for unassessed transfer pricing profits.
Capital allowances
From 1 April 2026 for companies and 6 April 2026 for unincorporated businesses, the main rate of writing down allowances (WDAs) was reduced from 18 percent to 14 percent. As a result, a hybrid rate applies for accounting periods straddling 1/6 April 2026. This reduction has been introduced to finance the new 40 percent First Year Allowance (FYA) for main rate expenditure incurred on or after 1 January 2026.
HMRC has updated its guidance on issues that may affect how to file a company tax return which now includes the new 40 percent FYA. According to HMRC, it will update its Corporation Tax online service in April 2027 for the new FYA. To claim this new allowance before then, the following boxes on form CT600 should be completed:
- boxes 725 or 750 for claim amounts, and
- box 760 for qualifying expenditure.
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