Business owners targeted in surprise Budget tax increase

Chancellor John Healey has resisted sweeping changes to the UK’s capital-gains tax (CGT) system. However, proposals included in today’s Budget are set to increase tax bills for many entrepreneurs and company owners who sell their firms (although there are also proposals for a new but narrow founder’s relief that may provide a significant benefit for company owners who come to sell high-growth businesses).

Pre-Budget speculation had focused on the future of CGT and what further changes could mean for entrepreneurs considering the sale of a company, bringing in investment or handing a business to the next generation. While the Chancellor has opted not to bring CGT rates into line with income tax on earnings, he has announced targeted updates that could have a significant impact on succession planning and how owners extract value.

Changes to business asset disposal relief

The latest changes to Business Asset Disposal Relief (BADR) are set to increase the tax burden on company owners even further. BADR, which was known as Entrepreneurs’ Relief when it was initially introduced in 2008, reduces the effective rate of CGT on the gains made when businesses are sold.

From 6 April 2027, the lifetime BADR limit is being cut from £1 million to £500,000. This follows recent increases in the rate of CGT that applies to gains that qualify for BADR. Until 2025, the BADR rate was 10%. It was raised to 14% in 2025 and then to 18% in April this year. Disposals that do not qualify for the BADR rate are charged at the standard CGT rate of 24%.

Founders’ relief: an incentive for high-growth businesses

In contrast to the less generous BADR regime, Healey announced a consultation on a new Founders’ Relief system, whereby individuals who set up high-growth businesses are able to benefit from lower rates of CGT when they come to sell.

Qualifying entrepreneurs and owners will in theory be eligible for a CGT rate of 10% on business sales. The Government’s initial proposals impose a £10 million lifetime limit on gains. In order to benefit from the scheme, entrepreneurs and their companies will be required to meet certain criteria related to turnover growth, number of employees and length of ownership.

According to the Government’s consultation document, these criteria appear to be particularly strict. For example, qualifying businesses will need to meet two of the following three tests:

• Average annual compound growth of 25% in turnover in three of the 10 years prior to disposal.
• Average annual compound growth of 25% in headcount in three of the 10 years prior to disposal.
• Expenditure of at least £1.5 million on research and development within three years of disposal.

We are expecting the consultation to close at the end of November and for the final criteria of Founders’ Relief to be available shortly after that.

Taken together, the clear message from these changes is that the government is shifting CGT incentives away from business owners generally and towards founders of companies that are able to sustain high rates of growth. Given the strict qualifying conditions for Founders’ Relief that appear to limit its scope, this should not be seen as a return of the historic Entrepreneurs’ Relief.

Alongside these immediate changes, the Government has also indicated its intention to continue reviewing the taxation of profit extraction and family business succession through future consultations on the distributions framework and related reforms. While many of the details are still to emerge, business owners and family enterprises should not wait for the final legislation before considering their options, particularly given the impact of the previously announced IHT changes to Business Property Relief

We recommend that our clients start conversations now to help identify potential succession, ownership and exit-planning opportunities, giving families and shareholders the flexibility to act when the rules become clearer. In an environment where the direction of travel is evident, but the destination is still being mapped out, being prepared is likely to be more valuable than trying to react once changes have been finalised.

Keep up to date with our Budget coverage

On 28 October, our experts will be providing instant reaction to the key Budget measures on our dedicated hub and our LinkedIn page. And in the following weeks, we’ll have in-depth analysis and advice on how the Chancellor’s measures will affect your business.