Ostensibly, the new Founders Relief announced in the 2026 budget is a very generous replacement for the steadily disappearing Business Asset Disposal Relief.
The headline is exciting for those potentially thinking of selling their business after April 2027, reverting the level of relief available to the 2014-2020 Entrepreneurs Relief provisions and offering would-be vendors the prospect of a £1.4m tax saving if their stake is worth £10m or more.
But on closer examination, the terms of the proposed relief make it likely that the number of vendors actually able to benefit from it in any given tax year, is vanishingly small.
While the headline indicates that it will be available for companies generating revenue of more than £10m, the reality is that the growth requirements indicate that at the time of exit the actual hurdle is £19.5m+. It is difficult to find precise data but there are perhaps 30,000 – 50, 000 UK privately held companies that turn over more than £20m.
The growth requirements are brutal (as anyone who has run a business will know). 25% per year for three consecutive years during the previous ten. These were ten years in which businesses battled a low growth economy and experienced the fall-out from a series of geo-political shocks. The FTSE 100 – the Uks largest listed companies – has generated total returns of around 8.7% over the last ten years.
Even if a company has achieved this remarkable growth objective, they also have to have either increased their full time employee count by 25% a year for three consecutive years in the last ten (Starting at 15, so not from start-up) , or to have incurred qualifying expenditure of £1.5m or more on R&D (qualified by reference to R&D tax relief claims) within the three years prior to disposal.
The hurdle (to be fair) is to meet two out of three of the growth and innovation targets. The employee and R&D objectives could conceivably be met by well-funded innovation businesses but the funding for such businesses typically comes from venture capital or private equity and in these businesses, it is extremely rare for a founder shareholder to be able to hold on to 25% of the equity all the way to exit, especially if the R&D spend is at the target levels.
Let’s assume that there are some businesses out there that can meet these requirements, one then has to consider whether the selling shareholders are likely to meet the qualification criteria.
To qualify for the Founders Relief a selling shareholder has to have held 25% of the company’s ordinary share capital from inception and to have held it for at least five years (so clearly you cannot qualify if you sell your company within 5 years of incorporation) and you have to have been a UK resident for the 5 years preceding the exit.
One wonders whether these target criteria are a disincentive to grant options, widen management teams, take on supportive external capital or even to start a business with the right cohort (if it is more than four people). They tend to defeat the “smaller share of a bigger pie” argument for sharing equity to accelerate business progress.
HMRC estimate that only 600 business founders a year will qualify for the new Founders relief. Let’s assume they are correct (though I suspect the number will be even lower than that) it would then cost the treasury £840m in relief.
Prior to the 2026 budget, BADR was worth up to £60,000 per qualifying shareholder. In 2023/24 44,000 taxpayers claimed it. Not all of these would have been claiming up to the £1m lifetime limit and the total cost to the treasury was around £400m.
Reducing the lifetime limit to £500,000 in the budget, will not save £200m because many of the 44,000 claimants would have been claiming for sums at or below this anyway with a larger proportion of claims relating to smaller gains.
One can logically surmise given their fiscal challenges that the Government would not be looking to give away tax through this change in the approach to relief for business vendors. Let’s say that the change in BADR limit might save them £100-£150m a year.
What then can we conclude from all this maths and the associated messaging from Government ?
The Chancellor has taken a widely applicable but relatively low value relief from UK entrepreneurs and is looking to target it at an economically (and politically) high value cohort of businesses which is likely to deliver tax benefits to a tiny population of individuals. For the majority of UK business people the likelihood of qualifying for founders relief is broadly equivalent to finding the pot of gold at the end of a rainbow.
Will the Founders relief drive behaviour amongst the business community?
I doubt it. The starting points for revenue and employee numbers typically count out start ups and are limited to significant sustained growth and innovation in already established companies. Such companies are as rare as hens teeth. If not already snapped up by Private Equity they will be looking at significant acquirer interest and high valuations. The relief looks to reward those who are already winning and whose choices are unlikely to be driven by tax.
There is also the issue that the entrepreneurial tax regime has changed so frequently over the last twenty years that in the time it would take someone to build a new one of these stunning businesses, it seems that the relief will almost certainly have been changed or withdrawn.
Cynically, if the Chancellor thought there were many such companies he wouldn’t be advancing such a generous offer at such a difficult time. This almost mythical relief allows him to trumpet his support for entrepreneurialism, innovation and growth at (likely) zero cost.
It is a pot of gold targeted at Unicorns.
