John Healey delivered his first Budget as Chancellor on 28 October announcing a number of measures that could affect entrepreneurs and their businesses.
These include a consultation on a new capital gains tax (CGT) relief for founders. The relief would provide a 10% rate of CGT on lifetime gains of up to £10m to “support founders and early investors who have made a significant long-term contribution to the creation and development of the UK’s most high-growth and innovative companies”.
At first this looks like a throwback to the previous limit for entrepreneurs’ relief (ER) before it was amended and rebranded as business asset disposal relief (BADR). However, founders’ relief will be far more limited than either ER or BADR.
Amongst the qualifying conditions, the founder will need to have held 25% of the shares in the company from when it was formed and then continued to hold those shares for at least five tax years before their disposal. The company must then satisfy a set of stringent conditions on a subsequent disposal of the shares in order for the relief to apply. The consultation document proposes conditions including UK presence and trading requirements, turnover of at least £10m and at least 15 qualifying full-time employees in the accounting period before disposal, and satisfaction of at least two out of three tests relating turnover growth, headcount growth and R&D claims.
The consultation closes on 30 November 2026 ahead of its implementation on 6 April 2027.
Alongside this, the government has announced a reduction in the lifetime limit on gains qualifying for BADR from £1m to £500,000 for disposals on or after 6 April 2027. This reduction is a further whittling away of the original £10m limit that applied to ER.
There were some welcome changes to company share option plan (CSOP) options. CSOP will be rebranded as enterprise management incentives 2 (EMI2). The intention is to reflect CSOP’s role as an alternative for companies that have grown beyond the qualifying conditions, or are not eligible, for EMI.
From 6 April 2027:
- The individual EMI2 option limit will be increased from £60,000 to £120,000 (having previously doubled from £30,000 to £60,000 from 6 April 2023).
- The maximum period for exercising EMI2 options while retaining tax advantages will be extended from 10 years to 15 years, bringing it into line with the maximum period that has applied to EMI options since 6 April 2026. As with the extension of the period for exercising EMI options, it will be possible to amend CSOP options granted before 6 April 2027 to benefit from this without losing tax advantages, provided that this is done in line with the legislation.
- The interaction between the EMI and EMI2 individual option limits will be removed, allowing eligible employees to use the full £250,000 EMI limit and £120,000 EMI2 limit independently. This will increase the maximum value of tax-advantaged options that an eligible employee can hold across the two schemes from £250,000 to £370,000.
Unlike EMI options, one of the key aspects of CSOP options is that the exercise price cannot be less than the market value of the shares at the date of grant without losing all of the CSOP tax reliefs. This means that it is crucial to get the right valuation approved by HMRC when the CSOP options are granted. If HMRC subsequently determines that the initial valuation is incorrect, which may be because inaccurate information was submitted to HMRC, then the entire difference between the exercise price and the market value of the shares at exercise of the option will be subject to income tax and potentially NICs. If an EMI valuation is subsequently challenged by HMRC, only the difference between the original valuation at the date of grant and the correct valuation at the date of grant would be taxed as income, and the remining growth in value of the shares would still be subject to CGT. This means that a robust valuation submission is essential for CSOP options.