Aimed at rewarding founders and early investors in companies achieving sustained high growth and innovation that are considered crucial to the future success of the UK economy, the relief is intended to offer a 10% CGT rate, subject to a lifetime allowance of £10m in gains per individual. It is proposed that the relief will apply to qualifying disposals made on or after 6 April 2027.
While Founders’ Relief is currently subject to consultation and has yet to pass through Parliament, the proposals highlight the Government’s intention to incentivise those who establish or help build businesses that are considered critical to growing the UK economy.
What are the proposed eligibility requirements?
As it is currently planned, the individual and company must meet the following requirements:
Individual shareholder
- Hold at least 25% of the company’s ordinary shares (with full rights) at the point of trading for which the company was formed (or preparation for that trade commenced)
- Held the shares and been a UK tax resident for at least five years prior to the date of disposal.
The company
- UK resident for corporation tax or carrying on business in the UK through a permanent establishment
- Have a substantial presence in the UK for the five accounting periods before the disposal
- A trading company or a holding company of a trading group (subject to some exclusions, such as property development)
- Continuing in the same trade from when the company was formed
- At least £10m turnover in the accounting period prior to disposal
- Employing at least 15 full-time qualifying employees.
In addition, the company must demonstrate success in growth and innovation by achieving at least two of the following:
- Turnover growth of at least 25% across three consecutive accounting periods within ten years before disposal, with a turnover of at least £10m in the accounting period before the first of these three periods.
- At least 25% qualifying full-time employee headcount growth across three consecutive accounting periods within the ten years before disposal – there must be at least 15 full-time employees in the accounting period before the first of these three periods.
- Spent at least £1.5m on research and development (R&D) which qualifies for an R&D Tax Claim and claimed that relief for at least one accounting period in the three years prior to disposal.
Preparing your business for growth and a potential sale
For any founder or investor who anticipates benefiting from Founders’ Relief (or indeed anyone looking to grow and protect their business in preparation for a possible sale), there are some key questions they should be asking themselves now:
- How do they intend to achieve sustained high growth in their company, and what legal strategies and protections might be required to support this? This is particularly relevant for those planning to take advantage of Founders’ Relief, which is expected to require companies to achieve sustained growth beyond specified thresholds.
- Do they have the requisite corporate shareholder or investment agreements in readiness for a potential sale? For founders considering an investment, restructuring or eventual exit, early corporate planning can help identify and address issues before they become obstacles.
- In the event of a sale, how will a majority shareholder ensure they can implement a sale? Have they considered the need for compulsory share transfer provisions, such as drag-along rights to facilitate a sale, which could be contained within the shareholders’ agreement and articles of association? Could a minority shareholder or group of shareholders potentially block a sale?
- Does their share structure and the rights attached to those shares support their desired outcome in the event of a sale?
- Is the company’s structure appropriate for its business needs? Would it be beneficial to consider implementing or varying a group structure? For example, if a company is looking to offer a new product, it may wish to consider which group company should own that product and any associated assets, such as intellectual property.
- Are the company records, including share registers and statutory registers, correct, valid and up to date? Any future buyer will want to see that these are in order.
- Are the company’s commercial contracts in place, correct and up to date? This can be particularly important where the whole appeal of a business to a potential buyer lies in its key client or supplier relationships. Do the contracts adequately reflect business needs? Will they help the company achieve the desired growth (such as provisions relating to price increases and contract reviews)? It is also important to consider whether any contractual provisions could affect a future sale, such as change of control provisions.
- Are the company’s assets adequately protected – such as key intellectual property? Could they be used to increase revenue (i.e. growth) for the company?
- How are the contracts of the company’s workforce (both employees and freelancers) managed? Will they qualify for the relief? Are employment contracts and policies up to date, and are appropriate agreements in place for freelancers and other contractors?
The above is just a selection of possible issues or scenarios that founders and investors may need to consider. However, it is important to be clear that addressing the above issues will not necessarily mean Founders’ Relief will be available. Eligibility will depend on the final legislation, once passed, as well as the circumstances of the founder, investor and company in question. Specialist tax advice will therefore be required alongside any legal advice.
How TWM can help
If you are considering how these proposals might affect your business, the experienced Corporate and Commercial team at TWM Solicitors can help you review your existing arrangements and identify any areas that may need attention ahead of future investment or a potential sale.
To arrange an exploratory call, please contact our Corporate and Commercial team.
More information on the Government’s consultation for Founders’ Relief can be found here.