Founders’ Relief: generous on paper, narrow in practice?

What is Founders’ Relief?

Founders’ Relief will apply a 10% CGT rate to qualifying disposals made on or after 6 April 2027, up to a lifetime cap of £10m per individual, so more than one shareholder in the same company could claim it in full.

This lifetime cap is reduced by amounts claimed under the limits for Business Asset Disposal Relief and Investors’ Relief from 6 April 2027. With BADR now charging 18% on qualifying gains, the tax savings gap between the two reliefs on a large exit stands to run into millions of pounds, which is why eligibility matters so much.

Who counts as a founder?

The Government has chosen a mechanical definition based on ownership at the outset, rather than on the role someone plays in the business. Under the proposals, an individual must:

• Have held at least 25% of the ordinary share capital, with matching voting and economic rights, when the company’s trade, or preparation for it, began,
• Have held the shares for at least five years before the disposal, and
• Have been UK resident under the Statutory Residence Test for at least five continuous tax years before the disposal.

Once someone qualifies, the relief covers all the shares they sell, including any acquired after the company started, and the 25% test can be met through the holding company of a trading group. Only individuals can claim, and because each founder needs a 25% stake at the start, no company can have more than four.

Claims for Founders Relief will go through the founder’s Self Assessment return.

Does it make up for the BADR cut?

For founders who meet the tests it is a substantial improvement on BADR, but the bar is set high enough that most established business owners will find the BADR cut is the change that impacts their exit. Three consecutive years of 25% compound growth means turnover roughly doubling, for example from £10m to almost £20m, and a business that has grown steadily for 20 or 30 years is unlikely to have done that within the last decade.

Other owners will fall at the first hurdle because of how they came to own the business. Second-generation owners who inherited shares, directors who bought in after the business started and companies that have changed direction over the years all sit uneasily with a test anchored to the day the trade began. The consultation does not yet explain how the founder test applies to a company acquired through a Management Buyout (MBO) or restructured through a group reorganisation, although it does invite views on how ownership structures and reorganisations should be treated.

That leaves a real gap in the policy. Owners who spent decades building a profitable, stable employer that never chased hyper-growth will see their relief fall to £500,000 at 18%, while a younger company with a sharp growth spurt and a large R&D claim could secure £10m at 10%.

Can family members become founders?

As drafted, a spouse, child or other relative who held 25% of the shares when the trade began would count as a founder in their own right, with a separate £10m cap, and the consultation sets no requirement for them to work in the business. That is a marked contrast with BADR, which requires a shareholder to be an officer or employee of the company throughout a qualifying period.

The test cuts both ways, however, because it looks only at ownership at the start. Gifting shares to family members later, a common step in exit and succession planning, would not turn them into founders, which makes the share structure agreed at incorporation one of the most valuable decisions a new business will take. Careful consideration from all perspectives is always essential in adopting a structure appropriate to particular circumstances.

The Government has already said it will consider targeted anti-avoidance rules aimed at artificial arrangements, and it has asked whether the conditions identify founders effectively, so this point is likely to be tested before the legislation is finalised.

The BADR changes do not take effect until 6 April 2027, which gives vendors a few months to complete transactions under the current £1m limit, and for an individual with £1m of qualifying gains, getting a disposal over the line before then could save around £30,000. Vendors who might meet the anticipated criteria for Founders Relief face a different choice, because waiting until after 5 April 27 could bring a 10% rate on up to £10m of gains, so it is worth modelling both routes before committing to a timetable.”

Steven Butcher, Tax Director, Price Bailey