OBN’s Investment & Tax Advisory Group (ITAG) Budget Summary
After months of ‘testing the water’ with various leaks of what might be to come, Rachel Reeves finally gave her second Budget speech on Wednesday 26 November (only shortly after the Budget was leaked by the Office of Budget Responsibility). So, after all the speculation, what changes were made that are important for the life sciences sector?
If we put aside any questions about whether the Budget has been costed out fully (allocating £10bn of receipts from tackling tax fraud is questionable, given that, by definition, this is an unknown quantum – we haven’t heard of any fraudulent activities being declared in tax returns), we can take some positives for the sector from this Budget.
Tax Support for Entrepreneurs
Behind the scenes on Budget Day, the Government published a Call for Evidence to discuss ways that the tax system can support start-ups and scale ups. It recognised the strength of the UK’s opportunities, with 10 of the top 20 universities across Europe for spin-outs. The call for evidence will look at a number of reliefs that may be introduced or improved to better support high growth companies.
A number of ‘scale-up friendly’ measures were also made in the Budget.
Extension of EIS
From 6 April 2026, the lifetime company investment limit under the enterprise investment scheme (“EIS”) will increase to £24 million (£40 million for knowledge intensive companies (“KICs”)), and the annual company investment limit will increase to £10 million (£20 million for KICs). The size of a company that can benefit from EIS will also increase, with the gross assets test increasing from £15 million to £30 million before the share issue, and from £16 million to £35 million immediately after the issue of shares. This is a huge support to companies in the sector, whose capital requirements are significantly higher than in other sectors.
There will be a reduction in income tax relief for VCTs from 30% to 20%, which will again be effective from April 2026. The Government states that this is designed to balance the amount of upfront tax relief compared to EIS, which does not offer dividend relief, and incentivise funds to seek out higher returns.
Extension of EMI
Enterprise Management Incentives (“EMI”) options were already the most tax efficient way to incentivise employees, but the Budget has improved the EMI scheme by extending a number of the limits. The limits extended are: the size of the company that can participate (increasing the gross asset limit from £30m to £120m and the employee limit from 250 to 500 employees), the value of unexercised options in a company from £3m to £6m (the value is assessed on the date the option is granted), and extending the EMI period from 10 years to 15 years. The limits will apply from 6 April 2026. Existing scheme rules will be permitted to be amended to allow for the increase in the option period from 10 to 15 years without triggering any deemed surrender treatment.
One requirement of EMI that is failed more than any other is the requirement to notify the grant of an option. The period to notify was extended from 92 days to align with the filing date of the annual return (6 July following the tax year of grant) in 2024, but the Budget announced that this requirement will be scrapped altogether in Finance Bill 26/27. We don’t know why this change is being made so far in the future, but it is certainly a positive one. (NB. Companies will still be required to report EMI option grants via the mandatory annual return).
Stamp Duty Reserve Tax
The fact that a number of businesses often choose to list overseas rather than stay in the UK was also acknowledged. To address this, the Budget announced that Stamp Duty Reserve Tax has been removed on agreements to transfer securities of a company whose shares are newly listed on a UK regulated market. The exemption will apply for a 3-year period from the listing of the company’s shares. Once in the post-listing period, the exemption will apply to all of the company’s securities (not just shares). Whilst this is a welcome change, it seems unlikely that this will lead to an increase in UK listings.
Tax Increases
There were a number of tax increases including against pension and savings income. However, of most significance to the sector is the increase in the dividend tax rate. This is likely to negatively impact investment as it reduces the returns available to investors. It will be interesting to see if there is any U-turn on this following the conclusions of the call for evidence mentioned above as this is not scale-up friendly.
