Founders’ Relief: Will Your Company Actually Qualify?

Budget 2026 announced a new Capital Gains Tax relief for founders: 10% on up to £10m of lifetime gains, for qualifying disposals made on or after 6 April 2027. Against the 24% main rate that is worth up to £1.4m.

It is also, on the government’s own estimate, going to reach about 400 businesses a year.

That figure is HMRC’s, not a sceptic’s, and it is the most useful fact available about this relief. The conditions are at consultation until 30 November 2026, so there is still time to say something about them. This blog is written to help you work out, quickly, whether any of it applies to you. For most readers the answer will be no, and that is worth establishing in a minute rather than in 2029.

Who this applies to

Owners of companies at or approaching £10m turnover who expect to sell. Founders who have held a quarter or more of the shares since the business started trading. And anyone who claims R&D tax relief and may one day exit, because the two are now connected in a way they have never been before.

The number worth starting with

HMRC’s tax information and impact note estimates that the relief will be claimable by approximately 600 individuals per year, across approximately 400 businesses per year. The Exchequer impact is scored at £260m in 2027-28, rising to £300m by 2031-32.

That tells you the design. This is not a broad relief for owner-managed business. It is aimed at a small number of companies that have grown quickly from an already substantial base, and the thresholds are set to keep it that way.

Three questions that will settle it for most readers

Before any of the detail, these three will tell most companies whether to carry on reading.

1. Did you hold at least 25% of the company’s ordinary shares, with the matching voting and economic rights, when trading or preparation for trading began? Not what you hold today, what you held at the outset. If you did not, you are out, and nothing later in this blog changes that.
2. Does the company have turnover of at least £10m and at least 15 qualifying full-time employees? Measured in the accounting period before the sale, counting only people working 35 hours or more a week, and excluding directors, contract and agency workers.
3. Can the company show two of these three: turnover growth averaging 25% a year across three consecutive years in the last decade, the same growth in employee numbers, or £1.5m or more of qualifying R&D expenditure claimed in the three years before the sale? One out of three is not enough.

A no to either of the first two ends it. If all three are a yes, the rest of this blog sets out what you need to establish and when. If not, skip ahead to what that means instead, because there is still something worth doing before April 2027.

Who misses out

The first question is the one that catches people out, because it is tested at a moment long past. Under the proposed rules, five equal co-founders holding 20% each all fail it, however the business performed afterwards. The same goes for a senior employee who took shares a year into trading, a second-generation owner who inherited, and a director who bought in later.

The growth tests exclude a different group. Compound growth of 25% a year over three years means turnover roughly doubling. A profitable business that grew steadily for twenty years is unlikely to have done that in the last ten. Companies that have changed direction may be caught by the no-major-change condition, and sole traders and partnerships are outside the relief entirely.

Two results run the other way and are worth knowing. Two co-founders at 50% each both qualify on the shareholding test. And a founder who started with 40% and was diluted to 15% through funding rounds can still qualify, because the test looks at the position when trading began rather than at disposal.

If this is not your relief

Most owner-managed businesses will conclude that Founders’ Relief does not apply to them, and that conclusion is still worth having early. The more useful question then becomes which treatment you can realistically expect on a sale. Business Asset Disposal Relief continues at 18%, but its lifetime limit halves to £500,000 on 6 April 2027, so owners planning a disposal either side of that date should check how much of the limit has already been used and review the timing with their tax adviser. Where a sale is being negotiated across the date, the disposal date itself needs establishing properly rather than assumed from the completion statement.

What the proposals require

If the three questions above were all a yes, this is the detail underneath them. Three layers, all of which have to be cleared.

The individual

• Held 25% of the ordinary share capital, with matching voting rights and rights to profits and to assets on a winding up, when the trade or its preparation began.
• Held the shares or securities for at least five tax years, and been UK resident under the Statutory Residence Test for five continuous tax years, before disposal.
• Only individuals can claim, though the 25% test may be met through the holding company of a trading group.

The company

• Within the charge to UK Corporation Tax, with a substantial UK presence for the five accounting periods before disposal.
• A trading company or holding company of a trading group, still in the trade it was formed for with no major change in its nature. Excluded trades follow the Enterprise Investment Scheme list.
• Turnover of at least £10m, and at least 15 qualifying full-time employees, in the accounting period before disposal, paid at no less than the National Minimum Wage.

Two of three growth and innovation tests

• Turnover and headcount each require average compound growth of 25% a year across three consecutive accounting periods within the ten years before disposal, from a base of at least £10m and 15 employees respectively.
• Innovation. Qualifying R&D expenditure of £1.5m or more for which all the conditions to claim were met, and for which the company did claim, across an accounting period or periods ending within the three years before disposal.

The R&D condition, and what it now carries

The innovation test is named for innovation but measured by R&D claims. The consultation is candid about this, acknowledging that not all R&D leads to innovation and that innovation can happen without qualifying expenditure, but choosing an indicator that businesses and advisers already understand.

It is also candid about what happens if the claim does not hold. If HMRC later challenges the R&D claim and determines that the expenditure does not qualify, the shareholder’s Founders’ Relief can go with it, and the additional Capital Gains Tax falls due with interest.

The qualification matters. A company needs two of the three tests, so this only bites where the R&D test was one of the two it relied on. A company that independently meets both the turnover and headcount tests is unaffected by a challenge to its R&D claim. For a company that cannot clear 25% compound growth on both measures, though, the innovation test is doing load-bearing work, and so is the claim behind it.

This is a new kind of consequence. Until now, a weak claim cost the company the relief, interest and the cost of the enquiry, with penalties depending on the circumstances. It did not reach a shareholder’s personal tax position years later, on a disposal that had nothing to do with it. The consultation also proposes a statutory right for an individual to request supporting information from the company, precisely because the evidence sits with the company and may predate normal record-keeping requirements.

The three routes compared

Worked example

A founder has held 30% of the ordinary share capital since the company began trading in 2020, and has been UK resident throughout. The company is still in its original trade, and in the accounting period before disposal had turnover of £22m and 60 qualifying full-time employees. It meets two of the three tests. Turnover was £10m in the accounting period immediately before a three-period growth window and £20m by the end of it, comfortably clearing the 25% compound annual rate, and it claimed £1.8m of qualifying R&D expenditure in the three years before disposal.

She sells in 2029 realising a gain of £4m. Assume a higher rate taxpayer, the annual exempt amount used, no allowable losses and no previous BADR or Investors’ Relief claims.

• With Founders’ Relief: £4m at 10% is £400,000.
• With BADR only, assuming its separate qualifying conditions are met: £500,000 at 18% is £90,000, and the remaining £3.5m at 24% is £840,000. Total £930,000.
• Difference: £530,000.

Now assume HMRC successfully challenges enough of the company’s R&D claim to take its qualifying expenditure below the £1.5m threshold. A partial adjustment would not necessarily matter, but this one does: the innovation test is no longer met, and because the company does not meet the headcount growth test there is no third test to fall back on.

BADR is not an automatic fallback either. Its own qualifying conditions would have to be met, and the claim deadline is the first anniversary of the 31 January following the tax year of disposal, so the amendment and enquiry provisions would need to be considered. If no alternative relief is available, the £4m gain is taxed at 24%, giving a total liability of £960,000. Against the £400,000 already paid under the original claim, the additional tax is £560,000, plus interest.

Figures are illustrative and depend on the assumptions stated. The conditions are proposed and may change before April 2027.

What the commentary says

Reaction has been unusually blunt, and almost all of it concerns the narrowness of the gate. Helen Miller, Director of the Institute for Fiscal Studies, called the relief "bonkers" and argued it rewards behaviour that harms productivity, giving founders reasons to manage reported growth, sell early, or avoid changing a business model to stay eligible. Dan Neidle questioned whether anyone can plan around an incentive that may be gone before they sell. The entrepreneur Tim Creswick called it a "pointless lottery", noting that five equal co-founders all fail the 25% test. Price Bailey summarised it as generous on paper and narrow in practice, and Blick Rothenberg, while calling it a bold and welcome move, warned the benefit will flow mainly to venture-backed companies rather than long-standing family businesses.

The government’s case deserves stating too. The tests are designed to identify companies whose sustained growth brings wider benefit through jobs and innovation, and the minimum thresholds exist so that growth is measured from a meaningful base rather than from nothing. A relief available to every business owner would cost a great deal more and target nothing in particular. The narrowness is the design, not an oversight in it.

The detail is still open. The consultation asks whether the company conditions create practical difficulties or unintended consequences, and whether there are alternative criteria for identifying innovative companies other than the R&D test. The Treasury’s own costing anticipates that some near-qualifying companies will restructure to become eligible, and names the size of the tax base as a principal uncertainty. Anyone sitting near a threshold has a reason to respond rather than wait.

What to do before 30 November

1. Establish the shareholding position at commencement. This is a documentary question about events that may be a decade old, and it decides everything else.
2. Test the company against the turnover and headcount thresholds using historic accounting periods. Whether you qualify in 2027 was partly settled by what happened in 2023.
3. If the innovation test is one of your two, look hard at the claims behind it. The threshold requires expenditure for which all the conditions to claim were met, not merely expenditure that was claimed.
4. Respond to the consultation if the conditions do not fit your business. It closes on 30 November 2026 and the Treasury has said the window is shorter than usual.

Lexmore’s View

For the companies it reaches, this relief is worth having. On a £10m gain the difference against the main rate is £1.4m, and dismissing it because the conditions are demanding would be a mistake.

But the honest answer for most owner-managed businesses is that they will not get through the gate, and they should hear that now rather than work it out in 2029. If your shareholding at commencement was below a quarter, or your growth has been steady rather than rapid, the planning conversation is a different one.

For the companies that might qualify, the innovation test changes what an R&D claim is. A claim prepared three years ago to a standard that felt adequate at the time may now be the foundation of a shareholder’s personal tax position, and an enquiry opened later can reach back and remove it. Check the shareholding. Check the growth. Check the claims.

How Lexmore can help

If the innovation test is likely to be one of your two qualifying routes, the question is not whether a claim was made but how well it would stand up. We review R&D claims to identify weaknesses, examining the qualifying activity, the competent professional’s judgement, the technical evidence and the apportionment of qualifying expenditure, and we set out plainly where the position looks exposed and what would strengthen it. No adviser can promise a claim will survive an enquiry, but most of the problems we find could have been fixed at the time.

The wider Capital Gains Tax position on a sale sits with your accountant or a specialist private client adviser, and we work alongside them rather than in place of them.

Concerned about the strength of your R&D tax claims? Speak to Lexmore about an independent review of your existing claims and the technical evidence behind them.

Our blogs on technological versus commercial uncertainty, identifying your competent professional and why no enquiry is not proof you qualified set out the standard a claim has to meet. Our Budget 2026 summary covers the other measures announced on 28 October.

References

• Capital Gains Tax: introduction of a new Founders’ Relief, tax information and impact note
• Founders’ Relief: technical consultation, closing 30 November 2026
• Budget 2026, HM Treasury, 28 October 2026
• Corporation Tax: R&D tax relief