Founders' relief, BADR and capital gains tax: Budget tax changes for business owners planning a sale

For business owners contemplating a sale of their shares, Budget 2026 has introduced some important changes to the tax treatment of disposals. 

From 6 April 2027, the lifetime limit for business asset disposal relief (BADR) is due to be halved, from £1 million to £500,000. At the same time, the government intends to introduce founders’ relief, with a headline 10% capital gains tax (CGT) rate on qualifying lifetime gains of up to £10 million. 

For a share sale already under consideration, the tax treatment could differ materially depending on whether disposal takes place before or after 6 April 2027. 
These changes sit within a wider package aimed at supporting entrepreneurs and high-growth businesses, including the proposed EMI2 share option scheme and measures intended to improve access to growth capital. My colleague Kate Culley looks at the new EMI2 share option rules in this blog: What is EMI2?

What is changing from 6 April 2027? 

Founders’ relief is proposed for qualifying disposals of shares or securities. BADR is wider and can also apply to certain disposals of a business or business assets. This article focuses on share sales. 

The BADR rate remains 18%, but its lifetime limit falls to £500,000 from 6 April 2027. From the same date, founders’ relief is proposed to provide a 10% rate and £10 million lifetime limit, reduced by amounts previously claimed under the BADR and investors’ relief lifetime limits. 

Importantly, founders’ relief is not yet settled legislation. The consultation closes on 30 November 2026 and the final rules could change. 

Founders’ relief: who qualifies? 

Under the proposed scheme, an individual must have held at least 25% of the company’s ordinary share capital when the trading activity for which it was formed, or preparations for that trade, commenced. The holding must carry corresponding voting, profit and winding-up rights. The individual must also have held their shares or securities for at least five years and have been UK resident for at least five continuous tax years before disposal. 

The 25% interest does not appear to need to be maintained until disposal. The challenge may instead be identifying when preparations for the trade began and evidencing the ownership position at that time. 

The company must also have turnover of at least £10 million and at least 15 qualifying full-time employees in the accounting period before disposal. It must then satisfy at least two of three separate tests covering turnover growth, employee growth and innovation. 

The turnover test requires annual average compound growth of 25% across three consecutive accounting periods within the 10 years before disposal. Turnover must be at least £10 million in the accounting period before the first of those three periods. Starting at £10 million, that means reaching around £19.5 million after three years. 

The headcount test uses the same timeframe. It requires annual average compound growth of at least 25% in qualifying full-time equivalent employees across three consecutive accounting periods within the 10 years before disposal, with at least 15 full-time employees in the accounting period before the first of those periods. 

The innovation test is different. The company must have incurred at least £1.5 million of qualifying R&D expenditure, met all the conditions for R&D tax relief and claimed that relief for an accounting period or periods ending within the three years before disposal. 

Requiring two tests sets a high bar. A founder could build a successful business yet fall outside the relief because growth was steady rather than sufficiently rapid or the company did not undertake enough qualifying R&D. The relief is therefore targeted at a narrow group involved in high-growth and innovative companies. 

Proving you qualify may be a challenge in itself 

Qualification could require shareholders to collate information going back many years, including historic ownership, share rights, residence, turnover, employee numbers and R&D claims. 

The government acknowledges that some information could fall outside normal statutory record-keeping periods and proposes giving claimants a statutory right to obtain relevant information from the company. 

There is an added risk where the R&D test is relied upon. If HM Revenue & Customs (HMRC) subsequently challenges the company’s R&D claim and a condition underpinning founders’ relief is no longer met, the founder could lose the relief and face additional tax and interest. 

Documenting entitlement could therefore become an important part of preparing for sale. 

What does 6 April 2027 mean for disposals already being considered? 

Price, deal certainty and commercial terms remain fundamental, but for a transaction around spring 2027 the tax difference could be material. 

For a shareholder who qualifies for BADR but is unlikely to qualify for founders’ relief, the reduction in the BADR lifetime limit could increase CGT by up to £30,000, reflecting the difference between the 18% BADR rate and 24% main rate on £500,000. 

Conversely, a shareholder who meets the founders’ relief conditions could face a significantly different tax outcome where the disposal occurs on or after 6 April 2027. On a £5 million qualifying gain, the difference between CGT at 24% and 10% is £700,000, before considering base cost, losses, previous relief claims and the detailed rules. 

Transactions should not automatically be accelerated or delayed because of tax. Shareholders should instead understand the consequences early enough for them to form part of the wider commercial decision. 

Timing requires particular care. The tax date of a disposal under a contract is not necessarily the exchange date, and specific provisions are proposed for contracts entered into before 6 April 2027 but completed afterwards. Advice should therefore be taken before transaction documents are signed. 

What should business owners do now? 

If you are considering an exit, the key questions are whether BADR or the proposed founders’ relief could apply and what this could mean for your after-tax proceeds. 

For transactions that could take place around 6 April 2027, timing will be particularly important. The tax position could be materially different depending on which side of that date the disposal falls, so now is a good time to understand how the changes could affect you. 

At PKF Francis Clark, we can review existing BADR entitlement, assess likely eligibility under the proposed founders’ relief rules and model the potential tax implications of a proposed transaction. If a disposal is already on the horizon, I would recommend having that conversation before the timetable and contractual arrangements become fixed. 

Read more Budget insights.