The government is consulting on a new Founders’ Relief, aimed at rewarding individuals who have started and grown successful, innovative UK businesses.
If introduced as proposed, qualifying founders could benefit from a 10% Capital Gains Tax (CGT) rate on gains of up to £10 million when selling their shares. The relief is expected to apply to qualifying disposals from 6 April 2027, and would only appear to apply to incorporated businesses.
To qualify, an individual would generally need to:
- Have owned at least 25% of the company when the business started trading (or began preparing to trade).
- Have held their shares for at least five years.
- Have been UK resident for at least five consecutive tax years before the sale.
The relief is intended for larger, high-growth businesses rather than the average owner-managed company. To qualify, the company would need to:
- Have a substantial UK presence and be within the UK Corporation Tax regime.
- Be actively carrying on a qualifying trade.
- Have annual turnover of at least £10 million.
- Employ at least 15 full-time employees.
The company would also need to satisfy at least two of the following three tests:
- Turnover growth: Average annual growth of at least 25% over a three-year period.
- Employee growth: Average annual growth of at least 25% in employee numbers over a three-year period.
- Innovation: At least £1.5 million of qualifying R&D expenditure that has benefited from R&D tax relief.
The proposed rules are considerably more restrictive than Business Asset Disposal Relief (BADR). While BADR remains available for many owner-managed businesses, Founders’ Relief is targeted at companies that can demonstrate significant scale, growth and innovation.
BADR currently allows qualifying business owners to pay CGT at 18% on lifetime gains of up to £1 million. However, the government has announced that the BADR lifetime limit will reduce to £500,000 from April 2027.
This also helps to explain why the new relief may be particularly valuable for founders of high-growth businesses, despite its more restrictive qualifying conditions.
The proposed relief could provide a valuable tax saving for founders of successful scale-up businesses. However, given the relatively high thresholds for turnover, employee numbers and growth, it is likely to be relevant to a much narrower group of business owners than BADR. For most owner-managed businesses, BADR is still likely to be the more relevant relief when planning an eventual exit.
Those hoping to benefit from Founders’ Relief will potentially need to invest in a three year “readiness for sale” programme to work to make sure the growth tests can be met.
The consultation is ongoing and the final rules may change before the relief is introduced.
If you have any questions about how the budget might affect you, do get in touch on 01242 776000 or tax@randall-payne.co.uk.