Founders' relief: a closer look

Under the government's proposals, an individual must have held at least 25% of the company's ordinary shares when it started trading, or preparing to trade, held shares for at least five years and been UK resident for five consecutive tax years before the sale. The company must also have turnover of at least £10 million and at least 15 qualifying full-time employees in the accounting period before the disposal. These minimum requirements apply regardless of how quickly the business has grown.

However, the biggest hurdle is the additional requirement to satisfy at least two of three growth and innovation tests. These involve average annual compound turnover growth of 25% over three consecutive accounting periods, equivalent growth in employee numbers, or at least £1.5 million of qualifying research and development expenditure on which relief has been claimed. Crucially, the turnover growth test requires sales of at least £10 million before the three-year growth period begins, while the employee growth test requires at least 15 qualifying staff at the outset. In other words, a company starting with £10 million of turnover would need to grow to approximately £19.5 million over three years. Growing from £1 million to £10 million, however impressive, wouldn't satisfy that test.

The qualifying growth period can fall within the ten years before the sale, but the company must still meet the separate £10 million turnover and 15-employee requirements immediately before disposal. Little wonder the government estimates that only around 600 individuals will qualify each year. With the lifetime limit for Business Asset Disposal Relief also falling from £1 million to £500,000 in April 2027, business owners contemplating a sale should be cautious about delaying it in the hope of securing the new relief. The detailed rules remain subject to consultation, but the proposed conditions suggest that relatively few businesses will qualify.