In last month’s Autumn Budget we saw a reduction to the lifetime allowance for gains qualifying for Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, from £1 million to £500,000. Alongside the reduction in BADR, the Government announced a new Founders’ Relief, with both expected to take effect from 6 April 2027.
On the face of it, the new Founders’ Relief seems a positive steps for businesses and entrepreneurs. It is intended to provide a 10% capital gains tax (CGT) rate on qualifying disposals of up to £10 million of lifetime gains for founders of high-growth and innovative businesses. The lifetime limit of £10 million will be reduced by any gains on which BADR or Investors’ Relief have been claimed since 6 April 2027.
However, unlike BADR, where the qualifying conditions have historically been relatively straightforward for many owner-managed businesses to meet, the proposed conditions for Founders’ Relief appear considerably more restrictive.
Under the current proposals, an individual would need to have:
- Held at least 25% of the company’s ordinary share capital from the point at which the relevant trade commenced.
As there is no requirement for the founder to retain a 25% interest at the time of sale, this is potentially beneficial, as their shareholding could be diluted below 25% without necessarily preventing them from qualifying for the relief. - Held the shares or securities for at least five years.
At this stage, it is unclear whether the founder must have held at least 25% of the company for the full five-year period, or whether it is sufficient to have held the shares being sold for five years, having held at least 25% when the trade commenced. - Been UK tax resident under the Statutory Residence Test for at least five continuous tax years before the disposal.
The company itself would also need to:
- Be a trading company (within the scope of UK corporation tax) without substantial non-trading activities or excluded trading activities
- Continue to carry on the trade for which it was established when the founder’s shares were issued, without a major change in the nature of that trade;
- In the accounting period prior to disposal;
- have turnover of at least £10 million
- have employed at least 15 qualifying full-time employees
Importantly, satisfying those conditions is not enough on its own. The company would then need to meet at least two of the following three growth and innovation tests:
- Turnover: achieve average annual turnover growth of at least 25% over three consecutive years, starting from turnover of at least £10 million. The three-year growth period must fall within the ten years before the business is sold.
- Headcount: achieve average annual growth of at least 25% in qualifying full-time employees over three consecutive years, starting with at least 15 full-time employees. The three-year growth period must fall within the ten years before the business is sold.
- Innovation: within the three years before the business is sold, spend at least £1.5 million on qualifying Research & Development (R&D) and claim R&D tax relief on that expenditure.
In practice, if measured from the minimum starting points, the first two tests would require turnover to increase from £10 million to approximately £19.5 million and qualifying full-time headcount to increase from 15 to over 29 over the three-year period.
The intention is clearly to target the relief at founders of businesses delivering significant growth, employment and innovation in the UK. However, the number and nature of these conditions demonstrate how narrow the relief could be in practice. That is reflected in the Government’s estimate that only around 600 individuals a year are expected to benefit from Founders’ Relief. By comparison, BADR was claimed by an average of approximately 48,000 individuals in each of the last five tax years.
So while a 10% CGT rate on gains of up to £10 million understandably grabs the headlines, the reality may be that the relief is available to a relatively small group of entrepreneurs.
The rules are not final
Importantly, Founders’ Relief remains subject to consultation and detailed legislation is still to follow. There is therefore a possibility that some of the proposed requirements will be amended or relaxed before the relief is introduced.
For now, therefore, entrepreneurs should not assume that they will qualify for Founders’ Relief, but equally should not rule it out until the consultation has concluded and we have the final legislation.
What should entrepreneurs be thinking about now?
For entrepreneurs considering an exit over the next few years, these changes reinforce the importance of planning early.
That does not necessarily mean accelerating an exit purely for tax reasons. Commercial considerations should always come first. However, founders should understand how the changing BADR rules could affect their net proceeds and whether they could qualify for the new Founders’ Relief regime.
More broadly, tax planning should form part of the conversation around an exit well before a transaction is being negotiated. Understanding the potential tax position early provides much greater scope to plan effectively.
Looking ahead
The reduction in the BADR lifetime limit will be disappointing for many entrepreneurs, particularly those who have spent a number of years building significant value in their business.
Founders’ Relief could provide a valuable alternative and its introduction should be welcomed. However, based on the proposals as they currently stand, it looks likely to be available to a relatively small number of founders, rather than providing a broad replacement for BADR.
The consultation process will therefore be important. If some of the more restrictive conditions are relaxed, the relief could become much more relevant to the wider entrepreneurial community.
If you are considering a future sale or other liquidity event and would like to understand how these changes could affect you, please get in touch with HaysMac’s Entrepreneur team.
