Founders’ Relief: Who does it benefit?

Of the many announcements made in John Healey’s first budget, the introduction of Founders’ Relief was likely to raise the most eyebrows within the UK business community.

However, many people will be asking the following two questions: First, what relief does it provide? Second, who does it benefit?

Unfortunately, under current proposals, the relief is likely to be inaccessible for many founders, with only the UK’s largest and rapidly growing firms eligible.

While many business owners may be unable to claim when it is first rolled out, understanding the new rules may influence future succession plans and business sale decisions.

What is Founders’ Relief?

For eligible claims for Founders’ Relief made from 6 April 2027, disposals will be subject to a reduced rate of Capital Gains Tax (CGT).

Whereas the standard rate of CGT is 24 per cent, founders will receive a favourable 10 per cent, with a cumulative lifetime limit of £10 million.

By contrast, gains that qualify for Business Asset Disposal Relief (BADR) are only reduced to a rate of 18 per cent up to a lifetime limit of £1 million, falling to £500,000 from April 2027.

Overall, Founders’ Relief can be significantly more valuable to qualifying business owners than BADR, with a greater potential for tax savings.

What are the qualifying conditions for Founders’ Relief?

While Founders’ Relief offers tantalising tax benefits, eligibility is designed to be highly exclusive. As a result, there are three individual sets of conditions that must be satisfied.

Firstly, for shareholders to qualify for Founders’ Relief, the following criteria need to have been met at the time of share disposal:

• They held the shares or securities for a minimum of five years before disposal
• They have been a UK resident for at least five years prior to the disposal, as determined by a statutory residence test
• They have held at least 25 per cent of the company’s ordinary share capital at the point the company started trading or preparing to trade.

Then, for a company to qualify for Founders’ Relief, the following criteria must be met at the time of share disposal:

• It had a turnover of at least £10 million in the accounting period before share disposal
• There were at least 15 full-time employees in the accounting period before the share disposal
• It is a trading company or the holding company of a trading group
• It falls within the net of Corporation Tax, with a substantial UK presence for its last five accounting periods

Finally, the company must pass two of the following three tests to demonstrate a level of growth, which will likely decide eligibility for many prospective claimants:

• There was an average growth, from a starting point of £10 million, of 25 per cent a year over three consecutive years within the ten years before disposal
• At least £1.5 million of qualifying research and development spending, with relief claimed for accounting periods ending in the three years before the sale
• The number of employees must have increased at a certain rate, starting from at least 15 employees. At least 15 full-time staff must also have been working during the year before the business was sold

Speak to an accountant

Founders’ Relief may be out of reach for a sizeable chunk of UK businesses, but there are other forms of CGT relief available.

Notably, BADR and Investor Relief exist among a host of other tax planning opportunities, which can significantly reduce the tax liability of a business sale.

Our accountants can help you evaluate the reliefs available, incorporating them into your wider business exit tax planning strategy.

Unsure which Capital Gains Tax relief you may be eligible for? Speak to our accountants for expert tax planning advice.