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Tax Bite – Budget 2026 – the new CGT Founders’ Relief and the cut to the BADR lifetime limit

Alongside the headline measures, this week’s Budget contained some significant news for business owners: a generous (but tightly targeted) new capital gains tax relief for founders of high-growth companies, and a less welcome halving of the lifetime limit for business asset disposal relief (“BADR”). HM Treasury has also published a technical consultation on the detailed design of the new relief, which closes on 30 November 2026.

This Tax Bite summarises the key points and some early thoughts – noting that no draft legislation has been published yet.

Founders’ Relief – the headlines

• A reduced 10% CGT rate on qualifying disposals, up to a lifetime limit of £10 million of gains (“Founders’ Relief”).

• The limit applies per individual, so more than one founder of the same company could claim.

• The relief will apply to qualifying disposals made on or after 6 April 2027.

• The £10 million limit will be reduced by amounts claimed under the BADR and Investors’ Relief limits from 6 April 2027 – so, in effect, there will be a single pot.

Compared with the 24% main CGT rate, a founder using the full £10 million limit would save up to £1.4 million of CGT, so this is a valuable relief for those who qualify. The difficulty is that, as currently proposed, relatively few will.

The individual conditions

The individual will need to:

• have held 25% of the company’s ordinary share capital (with corresponding voting rights and rights to distributable profits and assets on a winding up) at the point when the trade for which the company was formed, or preparation for that trade, commenced;

• have held the shares or securities 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.

Helpfully, once an individual qualifies, the relief will apply to all shares they dispose of in the company – not just their original founder shares – and the 25% test can be met through the holding company of a trading group. Only individuals can claim.

The 25% test is, however, a high bar and is a snapshot taken at the very start of the company’s life. A founding team of five or more equal shareholders would not get there, and neither would an early investor or key hire who came in after trading started, despite the consultation referring to “significant early investors”. The consultation is also silent on whether holdings of spouses, family trusts or personal holding companies are taken into account.

The company conditions

The company will need to:

• be within the scope of UK corporation tax (UK resident, or carrying on business in the UK through a permanent establishment), with a substantial UK presence for the five accounting periods before the disposal;

• be a trading company, or the holding company of a trading group, without substantial non-trading activities or excluded activities (using the EIS list of excluded activities, such as dealing in land, financial services and property development);

• continue the new trade it was established for when the founder’s shares were issued, with no major change in the nature of that trade (any other trades being treated in a similar way to excluded trades);

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

• have employed at least 15 qualifying full-time employees in that accounting period (working at least 35 hours per week and paid at least the national minimum wage, with directors, contractors and agency workers excluded).

The “no major change in the nature of the trade” condition looks likely to be one of the most contentious. Start-ups frequently pivot, and on the current wording a business that has successfully changed direction could find itself outside the relief.

Growth and innovation – two out of three

In addition, the company will need to meet at least two of the following three tests:

• Turnover test – average compound annual turnover growth of 25% across three consecutive accounting periods within the ten years before the disposal, starting from turnover of at least £10 million in the period before the first of those three periods.

• Headcount test – average compound annual growth of at least 25% in qualifying full-time equivalent employees over three consecutive accounting periods within the same ten-year window, starting from at least 15 full-time employees.

• Innovation test – qualifying R&D expenditure of £1.5 million or more, for which the company met all of the conditions to claim R&D tax relief and did claim it, for an accounting period or periods ending within the three years before the disposal.

To put the growth tests in context, 25% compound growth over three periods means turnover rising from at least £10 million to roughly £19.5 million, and headcount from 15 to around 30. A company that does not claim R&D relief at that level will need to meet both the turnover and headcount tests.

BADR – lifetime limit halved

The BADR lifetime limit is to be reduced from £1 million to £500,000 for disposals made from 6 April 2027. The BADR rate itself is unchanged at 18%. The government says that three quarters of BADR claimants will still obtain relief on their entire gain, but for those with larger gains the maximum saving compared with the 24% main rate falls from £60,000 to £30,000.

A few points to bear in mind:

• The Budget documents do not refer to any anti-forestalling rules. However, the 2024 BADR rate increases came with rules targeting unconditional contracts and elections out of share exchange rollover relief, so the draft legislation will need to be checked carefully when it is published.

• There is a potential timing tension. A seller who will not qualify for Founders’ Relief and has not used their BADR limit should consider whether a disposal can be completed before 6 April 2027. Conversely, a founder who is likely to qualify for Founders’ Relief may be better off waiting until on or after that date to secure the 10% rate. There may be ways to secure the commercial deal whilst tipping the sale into next tax year in appropriate cases, but whether this will work will depend on the detail of the new relief.

• It is not entirely clear from the consultation whether BADR claimed before 6 April 2027 (and indeed entrepreneurs’ relief) will reduce the £10 million Founders’ Relief limit, or only BADR claimed from that date.

Comment

Founders’ Relief is a welcome and valuable addition for founders of genuinely high-growth businesses, but it is clearly aimed at scale-ups rather than the typical owner-managed company. Combined with the halving of the BADR limit, many business owners will see their CGT position worsen from April 2027. The design may well change following the consultation, and clients considering exits over the next year or so should take advice early so that both regimes can be factored into timing and deal terms.

If you have clients who may require advice on any of this, please don’t hesitate to get in touch.