Budget 2026: What the Capital Gains Tax changes mean for business owners

Sheldon Cole, Tax Partner at Westcotts, examines the changes to Capital Gains Tax reliefs announced in the Budget and considers what they could mean for business owners, investors and companies looking to reward employees.

CGT rates and the annual exemption

As anticipated by most commentators, the Chancellor left the main rates of Capital Gains Tax (CGT) unchanged in his 2026 Budget.

The main CGT rates will remain at 18% and 24% for the rest of this tax year and the next, commencing 6 April 2027. The annual CGT exemption will also remain at £3,000 for the tax year commencing 6 April 2027.

However, the Budget introduces further complexity to the existing system of CGT reliefs.

Business Asset Disposal Relief

The lifetime limit for Business Asset Disposal Relief (BADR) will be halved from £1m to £500,000 from 6 April 2027.

This represents a further reduction in a relief that had a lifetime limit of £10m before March 2020.

With qualifying gains taxed at 18%, compared with the main higher CGT rate of 24%, the changes mean the maximum potential tax saving under BADR will fall to £30,000 per individual.

Investors’ Relief

Meanwhile, Investors’ Relief will continue with its individual lifetime limit remaining at £1m.

Broadly, an individual can claim Investors’ Relief where they have subscribed in cash for new, fully paid-up ordinary shares in an unquoted trading company on or after 17 March 2016 and subsequently sell those shares at a gain, having held them for at least three years.

The individual must be a passive shareholder rather than an officer or employee of the company. Where Investors’ Relief applies, qualifying gains are subject to CGT at 18%.

Founders’ Relief

The Chancellor has also announced a new Founders’ Relief, which will apply to qualifying gains made on or after 6 April 2027.

On the face of it, the new relief is attractive, with qualifying individuals potentially paying CGT at just 10% on up to £10m of lifetime gains. However, the proposed qualifying conditions look demanding and many business owners may find themselves excluded.

The exact design of Founders’ Relief is subject to a consultation running until 30 November. The £10m lifetime limit will also be reduced by any BADR or Investors’ Relief claims made by the individual on or after 6 April 2027.

As currently proposed by the Government, the main qualifying conditions are:

1. The individual must have held at least 25% of the company’s ordinary share capital for at least five years before disposal.
2. They must have held the shares when the company began trading or preparing to trade.
3. They must have been UK resident for at least five years before disposal.
4. The company must be within the scope of UK Corporation Tax and be a trading company without substantial non-trading activities. Certain activities, including farming, property development and dealing, will be excluded.
5. The company must have generated turnover of at least £10m and employed at least 15 full-time employees in the accounting period before disposal.
6. The company must also meet at least two of three growth and innovation tests:
   – A minimum 25% growth in annual turnover.
   – A minimum 25% growth in the annual number of full-time employees.
   – Qualifying R&D expenditure of at least £1.5m on which relief has been claimed.

These are relatively stringent conditions and it remains to be seen whether any will be relaxed following consultation.

Many SMEs across Devon, Somerset and the wider South West may struggle to qualify, either because of the nature of their trade or because they cannot meet the turnover, employment, growth or innovation requirements.

It is disappointing that the Government is seeking to introduce another complex CGT relief rather than reverse some of the restrictions imposed on BADR and Investors’ Relief in recent years.

While Founders’ Relief may be valuable to a relatively small number of successful, high-growth businesses, it appears likely that many SMEs across our region will be unable to benefit.

Employee share incentive changes

There was better news for businesses looking to recruit, retain and reward employees.

The Budget included several improvements to tax-advantaged employee share option schemes, including the Company Share Option Plan (CSOP) and Enterprise Management Incentives (EMI).

CSOP: From 6 April 2027, the individual option limit will double to £120,000, the option exercise period will be extended to 15 years and the interaction between the CSOP and EMI individual option limits will be removed.

EMI: The exercise window following a disqualifying event will increase from 90 to 180 days. In addition, as previously announced, companies granting EMI options on or after 6 April 2027 will no longer need to notify HMRC separately of each grant. Instead, the grants will be reported through the EMI annual return following the end of the tax year.

While CSOP options are largely used by listed companies, many SMEs across our region should qualify to grant EMI options to eligible employees.

These remain a flexible and potentially valuable way of incentivising employees, offering income tax and National Insurance advantages and the potential availability of BADR when the option shares are sold.

There can also be a significant benefit for the employing company, which may qualify for a Corporation Tax deduction based on the difference between the market value of the shares when the option is exercised and the price paid by the employee.

For business owners considering a sale or succession, the changes to CGT reliefs make it important to review plans ahead of April 2027. Equally, businesses looking to attract and retain key employees should consider whether the changes to share option schemes create new opportunities.

If you would like to discuss how the Budget announcements could affect your business or personal tax position, contact Sheldon Cole at Sheldon.cole@westcotts.uk.