Founders’ Relief: A Guide for UK Founders and Early Investors
The headline terms are generous, but the proposed conditions are strict. The relief is aimed at founders of, and significant early investors in, high-growth and innovative UK companies. This article explains how the relief is expected to work and what founders should consider now.
The Headline Terms
Rate: 10% capital gains tax on qualifying sales of shares or securities.
Lifetime limit: £10 million of gains per person, so each qualifying founder of the same company has their own limit. Any Business Asset Disposal Relief or Investors’ Relief claimed from April 6, 2027 will reduce this limit.
Start date: Sales made on or after April 6, 2027.
Status: The relief is not yet law. HM Treasury is consulting on the detail until 30 November 2026, and legislation is expected in Finance Bill 2026-27.
Who Qualifies?
To qualify, the individual must meet all of the individual conditions below, and the company must meet all of the company conditions and pass at least two of the three growth and innovation tests.
Individual Conditions
When the company started trading or preparing to trade, the individual must have held at least 25% of its ordinary share capital, voting rights, and rights to distributable profits and to assets on a winding up. They must also have held their shares for at least five years, and been a UK resident under the statutory residence test for at least five consecutive tax years, before the sale. They need not work for the company, so an early investor can also qualify.
Company Conditions
The company must be a trading company, or the holding company of a trading group, within the charge to UK corporation tax, and must have had a substantial UK presence for the five accounting periods before the sale. It must still carry on its original trade, with no major change in its nature, and must not have substantial non-trading activities or carry on activities excluded under the Enterprise Investment Scheme, such as dealing in land, financial services or property development. In the accounting period before the sale, it must have had turnover of at least £10 million and at least 15 qualifying full-time employees. (Directors, contractors and agency workers do not count.)
Growth & Innovation Tests
The first test requires average compound annual turnover growth of at least 25% over three consecutive accounting periods within the 10 years before the sale, measured from a turnover base of at least £10 million in the preceding accounting period. The second applies the same growth rate to full-time headcount, starting from at least 15 employees. The third requires at least £1.5 million of qualifying research and development spending, on which R&D tax relief has been claimed, in periods ending within the three years before the sale. To pass either growth test, a company will need to roughly double its turnover or headcount over three years.
Points to Watch
There is no partial relief. Each threshold must be met in full, so a company with turnover just under £10 million, or a founder who started with just under 25%, loses the relief entirely.
The starting shareholding is what counts. The 25% test applies when the company starts trading or preparing to trade, not throughout the founder’s ownership. Later dilution through funding rounds should not, by itself, prevent relief, and the relief is not limited to the founder’s original shares, although the treatment of reorganizations is still to be finalized. However, an executive who joins after trading has started cannot qualify, no matter how large their shareholding becomes. Because each qualifying founder needs 25% at the outset, no more than four people can qualify in respect of any one company.
Changing direction can cost the relief. A major change in the nature of the trade may mean the company fails the conditions. Businesses that have pivoted since they were set up should take note.
R&D claims carry personal risk. If a founder relies on the R&D test and HMRC later successfully challenges the company’s R&D claim, the founder may lose the relief and have to pay the extra tax with interest.
Good records will be essential. Founders may need company data going back 10 years. The government proposes to give shareholders a legal right to request this information from the company.
Business Asset Disposal Relief is also set to be cut. For founders who will not qualify, this is the more important change: The lifetime limit will halve from £1 million to £500,000 for sales on or after April 6, 2027, although the 18% rate will stay the same.
Next Steps
Founders’ Relief is a potentially valuable incentive but, as currently proposed, is likely to benefit only a small group of UK scale-ups. The rules may still change: The consultation closes on November 30, 2026, and founders and investors concerned about larger founding teams, changes of direction or group restructurings may wish to respond.
In the meantime, founders planning an exit should compare the tax position of selling before and after April 6, 2027, and those starting a new business should think carefully about how shares are split at the outset and keep clear records from day one.
Connect with a Pillsbury Propel partner to discuss how Founders’ Relief could affect your company, your next financing or your exit plans.