Budget 2025: Tax incentive schemes
Expanding the eligibility of the Enterprise Management Incentive (EMI) scheme
The Chancellor’s Autumn Budget 2025 delivered the most significant expansion of the Enterprise Management Incentive (EMI) scheme since its launch in 2000.
Key changes (effective for EMI options granted on or after 6th April 2026):
- Gross assets limit for the employing company increased from £30 million to £120 million. Maximum number of full-time equivalent employees increased from 250 to 500
- Total value of shares over which unexercised EMI options may be outstanding at any one time doubled from £3 million to £6 million
- Individual employee limit remains unchanged at £250,000 (unrestricted market value at grant)
- All other core rules (qualifying trade, independence, UK permanent establishment, etc.) remain in place
The accompanying policy paper highlights long-standing evidence that EMI-participating companies enjoy significantly higher employment growth and lower staff vacancy rates than comparable peers.
Gravita’s view
This is a transformative reform. The previous combination of £30 million gross assets and 250 employees had become an increasingly tight straitjacket for capital-intensive UK scale-ups, particularly in tech, life sciences and fintech where headcount often stays relatively modest while balance-sheet growth accelerates rapidly.
Raising both thresholds to £120 million assets and 500 employees, alongside doubling the company-wide option pool to £6 million, effectively brings hundreds of additional high-growth businesses into scope. It allows genuinely innovative UK companies to continue using the most tax-efficient equity incentive through Series B, C and even late-stage private rounds, without being forced into less attractive all-employee plans or cash bonus schemes that damage runway.
Venture capital trusts, Enterprise Investment Scheme investment limit increase and restructure
In the Autumn Budget 2025, Chancellor Rachel Reeves has announced targeted reforms to the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) to bolster UK innovation and scale-up funding, effective for investments made on or after 6 April 2026 (subject to Finance Bill 2025-26).
Key Changes for EIS:
- Annual company investment limit: Increased from £5 million to £10 million, with an enhanced £20 million (up from £10 million) specifically for knowledge-intensive companies (KICs) i.e. those investing at least 15% of operating costs in R&D
- Company lifetime investment limit: Raised from £12 million to £24 million overall, with £40 million (up from £20 million) for KICs
- Gross assets threshold: Lifted from £15 million to £30 million pre-investment, and from £16 million to £35 million post-investment enabling larger early-stage firms to qualify
Investor Income Tax relief: down from 30% to 20%
Gravita’s view
By doubling company annual and lifetime investment limits the Chancellor has materially increased the quantum of tax-advantaged capital available to high-growth UK companies from 6th April 2026. Although, the income tax relief for individual investors will decrease from 30% to 20%.
Frustratingly it still does not allow employees of those businesses to get similar relief for investing in the business in which they work.
Capital Gains Tax — Employee Ownership Trusts relief reduction
Previously, business owners could dispose of shares to an Employee Ownership Trust (EOT), a trust set up to facilitate employee ownership and claim 100% relief from Capital Gains Tax (CGT) on qualifying disposals, effectively eliminating the tax liability (with gains held over until future trust disposals).
Key change effective immediately for disposals on or after 26th November 2025:
- Relief reduction: The relief is halved to 50%. Only 50% of the gain on qualifying share disposals to EOT trustees will now be exempt; the remaining 50% becomes immediately chargeable to CGT at standard rates (24% for higher/additional rate taxpayers) with no Business Asset Disposal Relief (current tax rate of 14%) available.
Gravita’s view
This change came completely out of the blue. Given that the Government announced pretty much everything else in advance – some of which they will not go through with – it has come as a bit of a shock. Perhaps the largest being that it is effective immediately. Like any sale, EOT transactions take some time to complete.
Key points for business owners to consider:
- 50% CGT relief still represents an effective maximum tax rate of 12% on gains for higher/additional-rate taxpayers substantially below the standard CGT rates of 24%
- When combined with the unlimited income tax-exempt bonuses payable through an EOT (currently up to £3,600 per employee per year), the overall tax efficiency of the structure often remains compelling, particularly for trading companies with material annual profits
- The EOT route continues to offer a flexible, market-value sale mechanism without the need for third-party buyers
At Gravita, we have guided many businesses through successful transitions to employee ownership. Our experience shows that the decision to move to an EOT has always been driven primarily by long-term cultural, governance and succession objectives rather than short-term tax arbitrage.
For owners contemplating exits, the window to secure detailed planning and HMRC clearance remains open.
It is worth noting that the changes may cause a cash flow issue for the seller as it seems from the information currently available that they will need to settle the 12% tax liability on the whole gain where the cash may not be paid to them for many years to come.
In most third-party sales, the seller will receive their consideration over a period of 3 years. For EOTs the time frame is usually much longer – often between 7 and 10 years. So, it is possible that the seller of an EOT may not receive enough cash to pay the tax before the tax becomes due.
In third party deals, we tend to use loan notes to defer the tax liability until the cash is paid. However, the rules do not allow the redemption of the loan notes to attract any reliefs that may have been available on the sale of the shares – such as BADR (business asset disposal relief); the reason being that the asset you are selling is a loan note and not the original shares. The same issue will appear to be the case here with a potentially worse effect as the redemption of the loan note would trigger a tax charge at the usual CGT rates of 24%, negating the benefit of selling to an EOT in the first place.
Care will need to be taken in ensuring that sufficient funds are available to settle the resulting tax liability from the sale going forward – an issue that we could ignore under the 0% regime.
Changes to charity (and CASC) tax rules
The budget saw a few changes to tax reliefs for charities which are important for reliefs charities claim.
- Tainted donations for traders: these rules currently ensure that the usual tax reliefs for charities are not available where the donor enters arrangements to obtain a financial advantage, for themselves or someone else, in return for their donation. They do not usually apply to simple arrangements such as gift aid or gifting of shares and property but are there to stop certain tax avoidance arrangements. The government is going to lower the bar on this test and not solely look at the motivation of the person making the donation.
- Investment income: There are currently twelve types of investment income that that a charity can obtain tax relief on but only one of them is subject to the requirement that the investment must be made for the benefit of the charity. New rules will be put in place to extend this to all twelve types of investment income.
- Legacies: specific legacies left to a charity may receive significant Inheritance Tax relief. New rules are being put in place for these legacies (under Attributable Income rules) to ensure the legacy must be spent on the charity’s charitable purpose, otherwise it is subject to a tax charge. This measure equalises the treatment for charitable gifts that are left under the residual of an estate where these changes already apply.
Gravita’s view
These are sensible changes to the existing rules to make sure tax relief is given where funds and investments are made for the charitable purpose and to tighten the tax avoidance position for certain contrived charitable donations. Charities should review these new rules and obtain advice (especially when receiving legacies or large donations) to make sure they retain the valuable tax reliefs charities can receive.
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