Proposed founders' relief offers tax support for UK entrepreneurs but few are likely to qualify

The UK chancellor, John Healey, delivered a mixed message for entrepreneurs at the Budget on 28 October.

The chancellor did not increase capital gains tax (CGT) rates, as many had expected. Instead, he announced a further reduction in business asset disposal relief (BADR), which has already been cut repeatedly in recent Budgets. For disposals on or after 6 April 2027, the lifetime limit will fall from £1 million to £500,000. At current CGT rates, this will limit the lifetime tax benefit for higher and additional-rate taxpayers to £30,000.

Alongside the cut to BADR, the chancellor announced the introduction of a founders' relief, a new measure for entrepreneurs intended to focus tax support on starting and scaling businesses rather than exits. 

The new relief

Founders' relief is subject to a technical consultation closing on 30 November. The proposed relief would apply a 10% CGT rate to qualifying share disposals on or after 6 April 2027, subject to a lifetime limit of £10 million in gains per individual.

At first glance, the proposed relief resembles entrepreneurs' relief, before it was rebadged as BADR. Its eligibility conditions, however, are significantly more stringent.

The proposed conditions

The proposed conditions fall into three categories: the founder, the company, and growth and innovation.

To qualify, the individual would need to have:

• held 25% of the company’s ordinary share capital, together with corresponding voting rights and rights to distributable profits and assets on a winding up, when the trade for which the company was formed, or preparations for that trade, commenced;
• held the shares or securities for at least five years before their disposal; and 
• been UK resident for at least five continuous tax years before the disposal.

To qualify, the company would need to:

• be within the charge to UK corporation tax and have had a substantial UK presence for the five accounting periods before disposal;

• be a trading company (or the holding company of a trading group), excluding certain trades such as land dealing, financial services and property development;

• continue the new trade for which it was established when the founder's shares were issued, with no major change in the nature of that trade;

• have generated turnover of at least £10 million in the accounting period prior to disposal; and 

• have employed at least 15 qualifying full-time employees in the accounting period prior to disposal.

Layered on top of the last two tests are the growth and innovation conditions, requiring higher thresholds across three consecutive accounting periods within the 10 years before disposal.

The company would also need to meet two of the three growth and innovation conditions:

• Turnover test. Annual average compound growth in turnover of 25% across three consecutive accounting periods within the ten years before disposal. Turnover would need to have been at least £10 million in the accounting period before the first of those three periods.

• Headcount test. Annual average compound growth of at least 25% in qualifying full-time equivalent employees across three consecutive accounting periods within the ten years before disposal. The company would need to have had at least 15 full-time employees in the accounting period before the first of those three periods.

• Innovation test. The company must have incurred qualifying research and development expenditure of at least £1.5 million for one or more accounting periods ending within the three years before disposal.

Who is likely to benefit?

Under the current proposals, relatively few entrepreneurs will qualify for founders' relief when they dispose of their shares. HMRC's own estimates suggest that only around 600 individuals would qualify each year. It is also unclear how to identify founders who held a stake at the required early stage where the company has undergone a reorganisation or other restructuring. The consultation seeks views on this issue.

The requirement to have held a 25% stake when the business began trading could exclude entrepreneurs who joined later, even if they played a significant role in driving its growth. A change in the nature of the company's trade would prevent relief, even if the founder meets the personal conditions. The proposed growth and innovation conditions are also demanding and are likely to be met only by highly successful businesses.

The compliance burden is also likely to be significant because the conditions span the life of the investment. They apply at the outset (the founder's shareholding when trading commenced), throughout the holding period (the company's continuation of trade), and at various points before a sale (the growth and innovation tests). Taking advice only at the start or just before a sale will therefore not be enough. Founders will need to monitor their position and retain supporting records throughout their ownership. The company and the founder will also need to share information regularly as an exit approaches.

Osborne Clarke comment

Unless the conditions are relaxed following the technical consultation, the relief is likely to have limited practical value and be difficult to administer. 

The consultation closes on 30 November, offering an opportunity to influence the rules before the relief takes effect on 6 April 2027. Osborne Clarke is planning on submitting a response. Please get in touch if you would like us to include your comments in our submission.

Maryam Tariq, a trainee solicitor apprentice with Osborne Clarke, assisted with this Insight.