Ahead of the Budget, there was considerable speculation that Capital Gains Tax (CGT) might once again be in the Chancellor’s sights. Ultimately, there was no general increase in the main rates of CGT, with the focus instead falling on a new Founders’ Relief for entrepreneurs and a further restriction to Business Asset Disposal Relief (BADR).
What’s being proposed?
To qualify, an individual would need to have held at least 25% of the ordinary share capital, with the required voting and economic rights, when the relevant trade, or preparations for it, commenced. A five-year ownership period and five continuous years of UK residence before disposal would also be required.
The company would need to be within the scope of UK Corporation Tax, have a substantial UK presence for the five accounting periods before disposal, and be a trading company or holding company of a trading group. It would also need to continue the trade for which it was established, with certain activities, including dealing in land, financial services and property development, excluded.
Further conditions include turnover of at least £10 million and at least 15 qualifying full-time employees in the accounting period before disposal. More significantly, the company would need to satisfy at least two of the three growth and innovation tests. These are based on annual average compound growth of 25% in turnover or qualifying employee numbers over three consecutive accounting periods, or at least £1.5 million of qualifying R&D expenditure for which R&D tax relief has been claimed.
A narrower relief
These conditions demonstrate why Founders’ Relief is no replacement for the once-generous Entrepreneurs’ Relief. At its peak, that relief offered the same headline 10% rate and £10 million lifetime limit, but to a much broader range of business owners.
For more conventional family and owner-managed businesses, which will not qualify for Founders’ Relief, BADR remains the principal relief offering a preferential rate of CGT on a qualifying business disposal. However, its value has already been significantly reduced. With the BADR rate now 18%, compared with the main CGT rate of 24%, the current £1 million lifetime limit offers a maximum tax saving of £60,000 for gains that would otherwise be taxed at 24%. From 6 April 2027, the lifetime limit is due to fall to £500,000, reducing that maximum saving to just £30,000. The continued erosion of the relief inevitably raises the question of how much longer BADR will survive in any meaningful form.
What happens next?
The consultation closes on 30 November 2026, and the Government will then consider responses before finalising the provisions for Finance Bill 2026-27. The detailed conditions may therefore change before the relief takes effect.
What is already clear, however, is that Founders’ Relief does not represent a return to the generous Entrepreneurs’ Relief regime of the past. For many established business owners, the more significant Budget development may instead be the continuing erosion of BADR. Owners considering, or in the process of, selling their businesses should be seeking appropriate tax advice to ensure, where possible, they benefit from the current lifetime limit before it is halved on 6 April 2027.
How we can help
If you would like advice on any of these changes, please contact a member of our Tax team.