The new CGT Founders’ Relief proposal has not landed well and detailed feedback will need to be given in the consultation response by 30 November.
The basic problem is that, to work as an incentive, a founder needs to know that the 10% rate will apply at exit. As proposed, though, the answer will be ‘it depends’, due to the long list of conditions that need to be satisfied in future years, including the year before exit. These look at R&D spend and whether there is 25% growth in turnover above a £10m base (and 25% growth in headcount above a 15-employee base) over a three-year consecutive period before disposal, as well as a £10m turnover in the year before the disposal. There may also be doubt as to whether the same trade has persisted, and whether the company is in ‘financial services’ and therefore excluded from Founders’ Relief.
The proposed conditions are too tightly targeted and contingent to provide a major incentive at the time of founding the business. It could end up working well for a limited set of founders, but too few in my opinion. There is also the doubt as to whether the same regime will persist in five to ten years’ time at exit! I had thought the incentive was to be a new upfront relief at the time of founding, rather than a back-ended, uncertain CGT relief.
Initially, commentators were enthusiastic about the announcement, until they saw the detail. Few owner-managed businesses will reach £10m of turnover, let alone grow 25% a year from there, and the government expects only around 600 claimants a year. Announcing it as 10% on £10m of gains invited comparison with Entrepreneurs’ Relief.
It is better read as an extension of EIS and SEIS. Those schemes incentivise investors without providing any tax incentives for the founder. A founder selling an EIS-backed company might get £500,000 at the 18% BADR rate and pay 24% on the rest. The design of Founders’ Relief suggests this is exactly the target with the same EIS excluded activities and EIS 35-hour employee tests as well as an R&D-based innovation test, and a 25% ordinary share capital requirement seemingly tested only at the start before any funding round dilutes it. For the founder, the growth conditions then become a target with a reward attached, and a reason to keep scaling rather than sell early, which they may be under pressure from investors to do.
The new CGT Founders’ Relief proposal has not landed well and detailed feedback will need to be given in the consultation response by 30 November.
The basic problem is that, to work as an incentive, a founder needs to know that the 10% rate will apply at exit. As proposed, though, the answer will be ‘it depends’, due to the long list of conditions that need to be satisfied in future years, including the year before exit. These look at R&D spend and whether there is 25% growth in turnover above a £10m base (and 25% growth in headcount above a 15-employee base) over a three-year consecutive period before disposal, as well as a £10m turnover in the year before the disposal. There may also be doubt as to whether the same trade has persisted, and whether the company is in ‘financial services’ and therefore excluded from Founders’ Relief.
The proposed conditions are too tightly targeted and contingent to provide a major incentive at the time of founding the business. It could end up working well for a limited set of founders, but too few in my opinion. There is also the doubt as to whether the same regime will persist in five to ten years’ time at exit! I had thought the incentive was to be a new upfront relief at the time of founding, rather than a back-ended, uncertain CGT relief.
Initially, commentators were enthusiastic about the announcement, until they saw the detail. Few owner-managed businesses will reach £10m of turnover, let alone grow 25% a year from there, and the government expects only around 600 claimants a year. Announcing it as 10% on £10m of gains invited comparison with Entrepreneurs’ Relief.
It is better read as an extension of EIS and SEIS. Those schemes incentivise investors without providing any tax incentives for the founder. A founder selling an EIS-backed company might get £500,000 at the 18% BADR rate and pay 24% on the rest. The design of Founders’ Relief suggests this is exactly the target with the same EIS excluded activities and EIS 35-hour employee tests as well as an R&D-based innovation test, and a 25% ordinary share capital requirement seemingly tested only at the start before any funding round dilutes it. For the founder, the growth conditions then become a target with a reward attached, and a reason to keep scaling rather than sell early, which they may be under pressure from investors to do.
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