Founders' Relief: What the Budget 2026 Consultation means for Founders, Investors and Buy-outs

Overview

At Budget 2026 the UK Government announced Founders' Relief ("FR"), a new capital gains tax ("CGT") relief for individuals who have started, or invested early in, high-growth and innovative UK companies. HM Treasury has published a technical consultation on the design of the relief, which closes at 11:59 p.m. on 30 November 2026. The government intends to legislate through amendments to Finance Bill 2026-27, and the relief will apply to qualifying disposals made on or after 6 April 2027.

FR is not a return of Entrepreneurs' Relief ("ER"); it revives the headline ER terms (a 10% rate on up to £10 million of lifetime gains), but for a much narrower group: individuals who held 25% of the company when its trade, or preparation for that trade, began. The company must also be a trading company within the charge to UK corporation tax that has met scale, growth, and innovation tests.

Business Asset Disposal Relief ("BADR") will continue alongside FR. It will, however, become less generous. Under proposals announced at Budget 2026, the BADR lifetime limit will fall from £1 million to £500,000 for disposals on or after 6 April 2027.

Founders' Relief: proposed criteria

Key Terms

• There would be a 10% CGT rate on qualifying disposals of shares or securities, up to a lifetime limit of £10 million per individual. More than one individual can claim in respect of the same company.
• The £10 million limit will be reduced by amounts claimed under the BADR and Investors' Relief limits from 6 April 2027.
• Only individuals can claim.

Individual conditions

The individual must have:

• Held 25% of the company's ordinary share capital, with matching voting rights and rights to distributable profits and to assets on a winding up. This is tested when the trade for which the company was formed began, or when preparation for that trade began;
• Held the shares or securities for at least five years before the disposal; and
• Been a UK resident under the Statutory Residence Test for at least five continuous tax years before the disposal.

Ownership structures

• Once the individual qualifies, the relief applies to all shares they dispose of. It is not limited to the original shareholding or to shares acquired when the company started.
• The 25% test can be met through the holding company of a trading group.

Company conditions

The company must:

• Be within the scope of UK corporation tax, either by being UK resident or by carrying on business in the UK through a permanent establishment, and have 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. The excluded activities are the same as those under the EIS rules, such as dealing in land, financial services and property development;
• Still carry on the new trade it was set up for, with no major change in its nature. Any other trade the company carries on will be treated in a similar way to an excluded activity, so presumably it will count against the company if it becomes substantial;
• Have had 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 period. That means employees working at least 35 hours a week and paid at least the National Minimum Wage. Directors and contract or agency workers are excluded.

Growth and innovation conditions

The company must also meet at least two of these three tests:

• Turnover: Average compound turnover growth of 25% a year over three consecutive accounting periods within the ten years before disposal. Turnover must have been at least £10 million in the period before the first of those three.
• Headcount: Average compound growth of at least 25% a year in qualifying full-time equivalent employees over three consecutive periods within the same ten years. There must have been at least 15 full-time employees in the period before the first of those three.
• Innovation: At least £1.5 million of qualifying R&D expenditure, meeting all the conditions for an R&D relief claim for which R&D relief has actually been claimed for an accounting period or periods ending within the three years before disposal.

Comparison of Founders' Relief and BADR

Management incentive plans

The 25% test is applied when the trade, or preparation for it, began. Managers who acquire MIP or sweet equity at or after a private equity investment will therefore generally not qualify, however their equity is restructured. A founder who did hold 25% at that point could in principle obtain relief on later MIP shares, because relief is not limited to the original shareholding. The government is also considering targeted anti-avoidance rules aimed at artificial arrangements, such as company restructurings, designed to bring shares within the relief.

Points of uncertainty

Common rollover structures: A key question on private equity deals is whether FR remains available on an eventual exit to a founder who held 25% of the target company when its trade began but who subsequently exchanged target shares for Topco shares as part of a buy-out. Current CGT rules (s127 TCGA 1992, as applied by s135) treat the Topco shares as the same asset as the original shares, which would suggest that both the 25% test and the five-year holding period are satisfied by reference to the original shares. However, the consultation does not say whether FR will follow that approach, nor is it clear how the company conditions would then be applied. The consultation says references to a company should be read as including a group "where appropriate" and expressly allows the trading and 25% conditions to be met through the holding company of a trading group, but it does not explain how the remaining company conditions (such as the same-trade, turnover, headcount and growth tests) would apply to a new Topco. Until the legislation is published, there are good reasons to be cautious.

Continuity of trade: The company must continue the trade it was established for when the founder's shares were issued, with no major change in the nature of that trade. This is to some extent subjective (and caselaw on “major change” in the context of carry forward of corporation tax losses, although that test also covers changes in "conduct”, suggests that a series of gradual changes can together amount to a “major change”). Start-ups that have pivoted from their original idea may be particularly exposed.

R&D claims and later changes: If HMRC later determines that a condition was not met (for example, following a challenge to the company's R&D claim), the individual would lose the relief and pay the additional tax with interest. The consultation acknowledges that this raises compliance and taxpayer confidentiality issues, including how far HMRC can share information about the company's tax affairs with the individual, and seeks views on how they should be addressed. The robustness of the company's R&D claims therefore becomes a founder's personal tax issue.

NEXT STEPS

The consultation closes on 30 November 2026, and the government intends to legislate through amendments to Finance Bill 2026-27 so that FR applies to disposals on or after 6 April 2027. The conditions may change before then. Founders, investors and private equity sponsors considering exits or reorganisations over the next 12 to 18 months should factor FR (and the reduced BADR limit) into their planning now.

If you have any questions on FR, or would like to discuss responding to the consultation, please contact the authors or your usual Mayer Brown contact.