Given the rumours that the Budget 2026 would increase the rate of UK Capital Gains Tax (CGT), it was somewhat surprising that the Chancellor announced a new CGT relief. Under the guise of wanting Britain to have a "world-leading tax offer for founders and their companies", the new Founders' Relief provides founders of, and early investors in, "high-growth, innovative UK companies" a 10% rate of CGT on qualifying disposals made on or after 6 April 2027. The relief will only be of use to individuals.

The technical consultation on Founders' Relief, released today, will run until 30 November 2026 and can be found here.

As is the case with similar reliefs in the UK, there are some distinct conditions for the individual, the shareholding and the relevant company, which must be satisfied for Founders' Relief to be available.

Conditions for individuals 

The conditions which must be satisfied by the individual taxpayer seeking to benefit from Founders' Relief are set out below. The individual must have:

1. held 25% of the company’s ordinary shares, with equivalent voting, profit and asset distribution rights, at the point when the company began trading or preparing to trade;
2. held the shares or securities for at least five years before selling them (which may be through a holding company); and
3. have been UK tax resident for at least five consecutive tax years before the sale. 

These requirements give rise to a number of difficulties in respect of which the below is by no means exhaustive. 

Immediately, the so-called "25% condition" is rather odd. Unlike elsewhere in the technical consultation, where the term "at least" is used, it would appear that holding more than 25% of the company's ordinary shares at the outset of the trade would cause an individual to fail this condition. One would hope this is addressed or otherwise clarified as part of the technical consultation process. 

Second, perhaps perversely given the apparent policy behind Founders’ Relief, the requirement that the relief would only apply where the 25% condition is met at the point when the trading activity, or preparation for that activity, commenced would naturally mean any investors who (quite reasonably) delay investment until a company has started to trade, will be unable to benefit from Founders’ Relief altogether.

Third, the five-year shareholding period stands out as rather long. To take some comparisons, Business Asset Disposal Relief for CGT only requires a holding period of two years, whilst the Substantial Shareholding Exemption requires 12 months. It would be surprising if this didn't feature heavily in responses to the consultation.

Conditions for the company 

The conditions which must be satisfied by the company in respect of which the shares are held (and disposed of) are also set out below. That company must:

1. be subject to UK Corporation Tax; 
2. have a substantial UK presence for the five accounting periods before disposal; 
3. be a trading company or holding company of a trading group, with no substantial non-trading or excluded activities (note that the excluded activities will be the same as those set out for the Enterprise Investment Scheme such as dealing in land, financial services or property development);
4. maintain its original trade, with no major changes or additional trades;
5. generate at least £10 million in turnover in the accounting period before disposal; and
6. employ at least 15 qualifying full-time employees in the accounting period before disposal.

Putting aside the lack of clarity around what would satisfy the "substantial UK presence" condition, these requirements seem needlessly onerous. Not permitting major additional trades is an oddity. High-growth companies may add to or alter their business lines over time, particularly if they are seeking to reach at least £10 million in turnover (in practice it may be more). Ruling out eligibility for Founders' Relief (or at least putting it at risk) on that basis only serves to increase uncertainty and arguably cuts across the policy behind Founders’ Relief altogether.

The rigidity and prescriptiveness of the conditions may also give rise to distortive incentives. For example, the requirement to maintain 15 full-time employees may encourage bloat where a highly successful company only requires a relatively lean workforce.

Growth and innovation conditions

If the general company conditions weren't enough, Founders' Relief also requires the company to "demonstrate success in terms of growth and innovation" by meeting at least two of the following three tests:

1. Turnover test: Achieving average annual compound turnover growth of at least 25% over three consecutive accounting periods within the ten years before disposal, with turnover of at least £10 million immediately before the relevant growth period.
2. Employee test: Achieving average annual compound growth of at least 25% in qualifying full-time equivalent employees over three consecutive accounting periods within the ten years before disposal, starting from a minimum of 15 full-time employees.
3. Innovation test: Incurring at least £1.5 million in qualifying R&D expenditure and having claimed R&D tax relief on that expenditure for accounting periods ending within the three years before disposal.

To give some credit to the Chancellor here, it is sensible to rely on the existing R&D tax relief framework for the innovation test. It is also a welcome touch that, although the company must actually claim R&D tax relief, the Budget 2026 includes some efforts to ease the burden of making those claims (the details of which are available in Chapter 4 of the Corporation Tax Simplification for Business Investment paper).No doubt, though, some will feel that having to undertake expenditure which is eligible for R&D tax relief sets too high a bar for "innovation" and some consultation responses along these lines are to be expected. 

Turning to the turnover and employee growth tests, in typical UK tax law fashion, these are overly complex and could lead to seemingly arbitrary outcomes. Taking the turnover test, for example, assuming two companies otherwise satisfy all other relevant conditions, a company increasing its turnover from £5 million to £20 million over three years would fail the turnover growth test, despite quadrupling its revenue, because it did not meet the initial £10 million threshold. By contrast, a company increasing its turnover from £10 million to approximately £19.53 million over the same period would satisfy the test, despite achieving considerably lower growth over that same period and having a slightly lower total revenue at the end of that period. If this is a genuinely intended outcome of the tests, this needs serious reconsideration before Founders’ Relief is entered onto the statute books. 

Final thoughts 

Overall, as with any tax relief intended to encourage innovation and growth in the UK, Founders' Relief is a welcome addition to the ever-growing UK tax code. However, the conditions are likely to require much refinement to strike the right balance between targeting founders of, and investors in, the sorts of high-growth, innovative and scalable companies the UK Government wants to encourage, and ensuring that Founders' Relief is clear, carries a level of certainty and doesn't lead to seemingly arbitrary outcomes.