The newly introduced Founders’ Relief promises a 10% Capital Gains Tax (CGT) rate on up to £10 million of qualifying gains, providing a potentially meaningful incentive for entrepreneurs building ambitious UK businesses. In this article, Matthew Katz, Head of Corporate Finance, looks beyond the headlines at the proposed qualification criteria and asks whether the relief can fulfil its potential as a meaningful incentive for UK entrepreneurs.

There was plenty for entrepreneurs to like in the headline announcement of Founders’ Relief. For those who have spent years taking risks, creating jobs and building valuable businesses, the principle behind the relief is welcome, and a 10% CGT rate on up to £10 million of qualifying gains is significant. 

But building a successful business can be tough. The UK has incentives designed to encourage entrepreneurship and innovation, from EMI to R&D tax reliefs, and these can make a real difference along the journey. But a meaningful tax incentive when a founder eventually exits their business is different, it represents a tangible reward at the end of that journey. 

So, the ambition behind Founders’ Relief will be appreciated. The question is whether, under the proposals as they currently stand, enough founders will actually be able to benefit from it. 

How do you qualify for Founders’ Relief? 

The prospect of paying 10% CGT on up to £10 million of gains will naturally attract attention. But founders should not assume that the £10 million figure makes this a broadly available relief for anyone who starts and subsequently sells a successful business. Upon review, the proposed conditions are extensive. 

To qualify, an individual would need to have founded the company and held at least 25% of its ordinary share capital from the outset, alongside at least 25% of its voting rights, rights to distributable profits and assets on a winding up. They would also need to hold their shares for at least five years and remain continuously UK tax resident for the five tax years before disposal.   

The company itself would need turnover of at least £10 million immediately before disposal and at least 15 qualifying full-time employees. For these purposes, full-time means at least 35 hours a week, with directors, contractors and agency workers excluded.  

On top of that, the business would need to satisfy at least two of three growth and innovation tests: 

• 25% compound annual growth in turnover; 

• 25% compound annual growth in employee numbers; or 

• at least £1.5 million of qualifying R&D expenditure.  

Taken individually, there may be a rationale behind each condition. Collectively, however, they set a very high bar. 

Founders would effectively need to build a substantial, fast-growing UK business while maintaining a significant shareholding throughout its development. For businesses that take on external investment as they scale, the ownership requirements could be particularly relevant. 

That raises the risk that a relief intended to encourage entrepreneurship ultimately applies to quite a narrow population of entrepreneurs. 

What is next for Founders’ Relief? 

Importantly, the proposals are subject to consultation, so what we are currently seeing is not necessarily the finished product. This creates an opportunity for the government to make amends that will support the entrepreneur and founder community.  

With pragmatic changes to the qualification criteria, Founders’ Relief could become a genuinely powerful way to support and drive entrepreneurship in the UK. There will inevitably be a cost to the Treasury if more founders qualify, but that should be considered alongside the economic activity the relief is intended to encourage. 

If an effective incentive helps more people start and grow businesses, create jobs, invest and ultimately build valuable companies in the UK, greater take-up should be seen as a positive. 

Could Founders’ Relief evolve into something more easily accessed? 

When Entrepreneurs’ Relief was introduced in 2008, it provided a 10% CGT rate on the first £1 million of qualifying gains. Two years later, the lifetime limit increased to £10 million. With the main CGT rate at 28%, that created the potential for a considerably more significant tax saving for qualifying entrepreneurs.  

Entrepreneurs’ Relief became a meaningful incentive at the end of what can be a long, difficult and uncertain process of building a business. It provided a genuine reward for taking entrepreneurial risk while accepting that gains above the limit would be taxed at the prevailing rate. It was a fantastic incentive for founder-owned and founder-led businesses. There is every reason to hope Founders’ Relief can evolve in the same way. 

The principle behind Founders’ Relief is a good one. It recognises something that founders have known for a long time: building a successful business requires considerable risk, resilience and commitment. 

However, there is a strong economic argument for using tax policy to reward people for starting businesses, taking significant that risk, and building long-term value in the UK. 

Now the challenge is to make sure the detail lives up to the headline. 

How we can help 

Building, scaling or considering the future of your business? Our Corporate Finance and tax teams work with founders throughout the business lifecycle, from growth and investment through to succession and exit. Talk to us about what the proposed changes could mean for you. Fill in the form below and one of our team will be in touch.