Executive summary
This article summarises the main UK tax reliefs that can materially affect founders’ exit tax bills and investors’ after-tax returns: Business Asset Disposal Relief (BADR, formerly Entrepreneurs’ Relief), Investors’ Relief, EIS, SEIS, VCTs, R&D tax relief, and the Patent Box. It is written on the basis that the individual is UK-resident and within Self Assessment; other residence/domicile scenarios are flagged where they matter but are not fully analysed.
Several headline changes in the last 18 months have shifted planning priorities:
Capital Gains Tax (CGT) rates rose sharply: the main CGT rates on most assets increased to 18% (basic-rate band) / 24% (higher/additional-rate band) for disposals on or after 30 October 2024, and the CGT annual exempt amount is £3,000 (and is retained at £3,000 for 2026/27).
BADR and Investors’ Relief are less generous than many clients still assume. BADR/ Investors’ Relief are 14% in tax year 2025/26 and are legislated/announced to rise to 18% from 6 April 2026, broadly converging towards the main lower CGT rate. Investors’ Relief also now has a £1m lifetime limit for disposals from 30 October 2024 (previously £10m).
EIS/SEIS remain core reliefs for angel-style risk capital, with 30% (EIS) and 50% (SEIS) income tax reducers, plus CGT advantages and loss relief mechanics - but the compliance chain (company statements → certificates → return entries) is non‑negotiable.
VCTs are changing: front-end income tax relief remains 30% for subscriptions up to £200,000 in 2025/26, but is set to reduce to 20% from 6 April 2026. From the same date, the investee company size and fundraising limits for EIS/VCT are due to expand (gross assets test and annual/ lifetime limits), aimed at supporting scale-ups.
For growth companies themselves, R&D and Patent Box are often the most material entrepreneurship reliefs because they affect cash runway, valuation, and post‑raise dilution. Since 1 April 2024, the merged R&D scheme (20% expenditure credit) is the default for most claimants, with Enhanced R&D intensive support (ERIS) for qualifying loss-making R&D‑intensive SMEs; both come with stricter process requirements (notification and mandatory additional information).
The Different Reliefs: Comparison Table
Relief | Eligibility snapshot (UK-resident individuals unless noted) | Core tax benefit | Key holding period / timing | Typical use-case |
BADR | Founder/owner-manager disposing of a qualifying business (sole trade/partnership) or shares in a “personal company” (incl. 5% tests), meeting the qualifying period | CGT at 14% in 2025/26 on qualifying gains up to £1m lifetime | Conditions met for 2 years up to disposal; claim by statutory deadline | Founder exit or disposal of business assets |
Investors’ Relief | External investor in unlisted trading company shares subscribed for in cash (generally not an employee/paid director); shares issued ≥17 March 2016 and disposed ≥6 April 2019 | CGT at 14% in 2025/26 on qualifying gains up to £1m lifetime (for disposals ≥30 Oct 2024) | 3-year holding period | Long-hold “scale-up” investment outside EIS/SEIS/VCT (or where those don’t fit) |
EIS | Subscription for new ordinary shares in a qualifying unlisted company; investor not “connected” (>30% etc) for income tax relief | 30% income tax reducer on up to £1m (or £2m if ≥£1m in KIC); CGT deferral + CGT-free growth (if conditions met) + loss relief | At least 3 years to retain relief / get CGT exemption; claim window up to 5 years after 31 Jan following tax year | Angel/HNW risk capital into early-stage/scale-up qualifying companies |
SEIS | Seed-stage subscription into very early company meeting tighter limits | 50% income tax reducer on up to £200k; CGT reinvestment relief and CGT-free growth; loss relief | At least 3 years for CGT disposal relief and to avoid IT relief withdrawal | Seed investing (earliest rounds) |
VCT | Subscription for new ordinary shares in an approved VCT (listed fund); age ≥18 | “Front-end” income tax reducer (30% to 5 Apr 2026; 20% from 6 Apr 2026), tax-free dividends, CGT-free disposal | Must hold subscription shares 5 years to keep IT relief; claim window up to 4 years after tax year end | Diversified venture exposure, often for higher-rate taxpayers seeking tax-free dividends |
R&D tax relief (company-level) | Company is trading, within Corporation Tax, and has qualifying R&D projects | Merged scheme: 20% taxable expenditure credit; ERIS: 186% deduction + payable credit up to 14.5% of surrenderable loss | Applies by accounting period start date; additional info and (sometimes) notification required | Runway/cashflow support for innovative companies |
Patent Box (company-level) | Company profits from exploiting qualifying patents/rights, owns or exclusively licenses-in, and has done qualifying development | Effective 10% Corporation Tax on qualifying patent profits via a deduction | Must elect within 2 years after the relevant accounting period | Scale-ups with protectable IP and growing profits |
Relief-by-relief deep dive
Business Asset Disposal Relief
Purpose
BADR reduces CGT on qualifying disposals of business assets and shares by individuals (and certain trustees), historically positioned as an “entrepreneur exit” incentive.
Who/what qualifies
BADR is available to individuals (and some trustees), not companies.
There are three main routes to a qualifying disposal:
Disposal of the whole or part of a business (sole trade or partnership), where the assets disposed form part of that disposal (not simply selling assets out of a continuing business unless it is a genuine disposal of part).
Disposal of assets after cessation: you must have carried on the business for the qualifying period ending on cessation, and the asset disposal must be within 3 years of the business ceasing.
Disposal of shares/securities in a “personal company”: over the 2-year qualifying period, the company must be your “personal company”, and must be a trading company or the holding company of a trading group, and you must be an officer or employee of that company (or group).
For disposals from 29 October 2018 onwards, “personal company” requires at least 5% of the ordinary share capital and voting rights, plus at least 5% entitlement to distributable profits/assets on a winding up or at least 5% of proceeds on a sale of the company.
A practical nuance for growth companies is dilution: if your percentage falls below 5% because the company issues more shares, you may still be able to claim by electing for a “deemed disposal and reacquisition” immediately before the dilution (with possible deferral of the resulting gain).
Key tax benefits (rates, allowance, mechanics)
The relief is constrained by a £1 million lifetime limit of qualifying gains (aggregated across all BADR claims). The portion within the limit is charged at a reduced CGT rate; any excess is taxed at normal CGT rates.
BADR rates have changed recently:
10% for qualifying disposals on or before 5 April 2025
14% for qualifying disposals from 6 April 2025 (2025/26 tax year)
18% for qualifying disposals on or after 6 April 2026 (announced/legislated)
Holding periods and time limits
The qualifying conditions must be met throughout a 2-year qualifying period ending with the disposal date (or cessation date in the cessation route).
Claiming deadline: you must claim by the first anniversary of 31 January following the tax year of disposal (for example, a 2024/25 disposal → claim by 31 January 2027).
Interaction with other reliefs
BADR interacts most commonly with:
the CGT annual exempt amount and capital losses (which can reduce the amount charged at either BADR or main rates);
elections on share exchanges/reorganisations where you may elect for the exchange to be treated as a disposal so that BADR is claimed at that point;
EIS deferral of gains: deferred gains can still later qualify for BADR based on the conditions at the time of the original disposal, even though the tax point is later.
share options under EMI: there are specific BADR rules for EMI shares that can allow BADR even without meeting the standard 5% tests, if timing conditions are met.
Common pitfalls and non-compliance risks
Points that frequently derail BADR in practice include:
not meeting the expanded 5% economic entitlement tests introduced from 29 October 2018 (especially with alphabet shares, loom shares, and growth shares);
inadvertently failing the trading company condition because of substantial non-trading activities;
missing the 3-year window for post-cessation asset disposals; attempting to claim on goodwill where a sole trade/partnership business is transferred to a close company in which the seller (and connected persons) hold 5% or more - BADR is restricted for goodwill in that scenario (subject to limited exceptions).
failing to claim by the statutory deadline (or failing to evidence earlier claims for lifetime limit tracking).
Worked example (2025/26 disposal)
Assume a founder sells shares in March 2026, realising a gain of £1,200,000. They have no unused basic rate band and are otherwise a higher/additional-rate taxpayer. AEA is £3,000 (2025/26). Main CGT rate is 24%. BADR applies up to the £1m lifetime limit at 14%.
Taxable gain after AEA: £1,197,000
BADR portion: £1,000,000 × 14% = £140,000
Non-BADR portion: £197,000 × 24% = £47,280
Total CGT with BADR: £187,280
CGT without BADR: £1,197,000 × 24% = £287,280
Tax saving: £100,000
How to claim / compliance
Claims are normally made through Self Assessment, but can also be made in writing or via the BADR claim form referenced in HMRC’s helpsheet. The deadline is the statutory first anniversary of 31 January following the tax year rule.
Enterprise Investment Scheme
Purpose
EIS is designed to channel private risk capital into qualifying unlisted trading companies by compensating investors with income tax and CGT reliefs.
Who/what qualifies
At investor level, relief generally requires that you subscribe for newly issued ordinary shares, receive the appropriate compliance certificate, and are not connected with the company for the income tax relief (broadly including employment/paid directorship and >30% control tests).
HMRC’s EIS helpsheet highlights several specific “red flags” that make investors ineligible, including tax avoidance purpose, protected returns, linked loans, and pre-arranged exit or risk-protection arrangements.
EIS is only available where the company has followed the compliance process: the company submits a compliance statement (EIS1) and, once accepted, is authorised to issue investor certificates (EIS3) (or EIS5 for investments via certain approved knowledge-intensive funds).
Key tax benefits (rates, allowances, mechanics)
Income tax relief:
30% income tax reducer on subscriptions up to £1m per tax year (or £2m if at least £1m is in knowledge-intensive companies).
Relief is limited to the investor’s UK income tax liability; unused relief cannot be carried forward.
Investors can elect to treat some/all of the investment as made in the preceding tax year (carry back), subject to annual limits and having the certificate.
CGT reliefs:
Deferral relief (on gains from disposal of any asset) where the gain is reinvested into EIS shares: investment must be made between 1 calendar year before and 3 calendar years after the disposal giving rise to the gain. The deferred CGT crystallises when the EIS shares are disposed of, the company ceases to qualify, the investment is repaid/redeemed, or the investor becomes non-resident.
CGT exemption on the EIS shares themselves: if you received (and keep) income tax relief and hold the shares for the minimum period (at least 3 years), gains on the EIS shares are exempt.
Loss relief: if EIS shares are sold at a loss, the net loss (after reducing for income tax relief) can—at the investor’s option—be set against income (current or preceding tax year).
Holding periods and time limits
EIS shares must typically be held for at least 3 years to prevent withdrawal of income tax relief and to secure the CGT exemption.
Claim deadlines:
HMRC’s guidance states that EIS claims can be made up to 5 years after the 31 January following the tax year of investment.
Interaction with other reliefs
The interactions that matter most in practice are:
BADR on deferred gains: where a gain was eligible for BADR when originally realised, BADR can still be claimed when that gain later comes back into charge after an EIS deferral event.
EIS can sit alongside SEIS and VCT in the same tax year, subject to each scheme’s own limits.
EIS shares may also qualify for Inheritance Tax business property relief in some circumstances (this is not an EIS-specific relief, and reforms announced for 6 April 2026 may affect wider relief planning).
Common pitfalls and non-compliance risks
Repeated drivers of denied/withdrawn relief include:
failing the connected tests (especially around paid directorship/employment and >30% control);
receiving value from the company (money, benefits, or arrangements) or having loans linked to the investment;
not having the certificate (EIS3/EIS5) before claiming;
the investee company later ceasing to meet scheme conditions within the relevant period (which can cause relief withdrawal and, in deferral cases, earlier CGT crystallisation).
Recent legislative/Budget changes to note
Three changes are most relevant to client briefings:
EIS and VCT sunset clauses (which previously limited income tax relief to shares issued before 6 April 2025) were extended to 6 April 2035.
From 6 April 2026, investee-company eligibility/fundraising limits under EIS and VCT will expand materially: the gross assets test rises to £30m pre‑issue / £35m post‑issue, and company annual/lifetime limits double (including higher limits for knowledge-intensive companies).
From the same date, VCT income tax relief changes (covered in the VCT section).
Worked example (income tax relief + CGT-free growth)
Assume an investor subscribes £100,000 for qualifying EIS shares (certificate received), and claims the full income tax reducer:
Income tax reduction: £100,000 × 30% = £30,000 (assuming sufficient UK income tax liability).
If the shares are sold after 3+ years for £160,000:
Economic gain: £60,000
CGT on that gain: £0 (because EIS disposal gains are exempt if income tax relief was received and not withdrawn, and minimum holding conditions are met).
Without EIS disposal exemption, that £60,000 gain would generally be taxed at up to 24% (depending on the investor’s income band and other gains).
How to claim / compliance
Operationally, EIS claims are certificate-driven:
The company submits the online EIS compliance statement and HMRC issues an authorisation with a Unique Investment Reference, enabling the company to provide EIS3 certificates to named investors.
Investors claim through Self Assessment (or by submitting the claim section of the certificate) once they have EIS3/EIS5.
Investors should retain certificates and be prepared to evidence each subscription and the claim amounts, as HMRC may request them.
HMRC’s Venture Capital Schemes Manual is the main technical reference set for the scheme.
Seed Enterprise Investment Scheme
Purpose
SEIS is the seed-stage sister scheme to EIS, designed to support very early-stage companies by offering investors stronger income tax relief and a distinctive CGT reinvestment relief.
Who/what qualifies
At a high level, SEIS is limited to smaller, younger companies. As of the post‑April 2023 expansion:
a company can raise up to £250,000 through SEIS;
gross assets limit increased to £350,000;
the new qualifying trade age limit increased from 2 years to 3 years;
the investor annual limit increased to £200,000.
HMRC’s SEIS application guidance includes further entry conditions, such as fewer than 25 full‑time equivalent employees at issue and restrictions where the company has already used EIS or VCT funding.
At investor level, SEIS relief is only claimable once the investor holds a SEIS3 certificate; and (as with EIS) anti-avoidance principles apply (commercial purpose, no avoidance scheme).
Key tax benefits (rates, allowances, mechanics)
Income tax relief:
50% income tax reducer on subscriptions, capped at £200,000 per tax year (with carry-back available).
CGT:
two separate reliefs:
SEIS reinvestment relief: up to 50% of a gain can be exempt where gains arising in the tax year are reinvested in SEIS shares on which SEIS income tax relief is also obtained; the maximum exempt amount is effectively capped (for 2024/25 the helpsheet explains a maximum of £100,000).
SEIS disposal relief: gains on SEIS shares disposed of after they have been held for at least 3 years are exempt where the investor received (and kept) SEIS income tax relief on the subscription (with limited allowance where relief was restricted purely because income tax liability fell to nil).
Loss relief: losses are computed net of income tax relief and can be relieved (including against income in appropriate cases, as reflected in HMRC’s venture capital schemes overview).
Holding periods and time limits
Minimum holding period for disposal relief is 3 years; if SEIS shares are sold within 3 years (other than in limited no-gain/no-loss spouse scenarios), income tax relief is generally withdrawn in whole or part.
Claims must follow HMRC’s time limits: income tax relief claims follow the same general up to 5 years after 31 January following the tax year of investment rule described in HMRC guidance.
For reinvestment relief claims, the SEIS helpsheet gives a worked time limit example (for 2024/25, latest date 31 January 2031), illustrating that the claim deadline can be materially later than the investment date but is still subject to statutory time limits.
Interaction with other reliefs
Two interactions are particularly important:
You can only claim SEIS reinvestment relief if you also obtain SEIS income tax relief on the same subscription.
Investors often stage investment across schemes: SEIS for seed, then EIS for follow-on rounds (company-side structuring must still comply with both schemes’ conditions).
Common pitfalls and non-compliance risks
Common failure points include:
claiming before receiving SEIS3 (or failing to retain it); missing the requirement to be within the annual investment limits and/or incorrectly allocating carry-back; attempting reinvestment relief without securing SEIS income tax relief; disposal within 3 years (triggering income tax relief withdrawal and loss of disposal relief); company-side ineligibility (e.g., company too old, over gross assets/employee limits, or already used certain other schemes).
Recent legislative/Budget changes to note
The 6 April 2023 SEIS expansion is the major recent structural change: it increased both investor limits and company eligibility thresholds, including the company investment cap (£150k → £250k), gross assets (£200k → £350k), company age (2 → 3 years), and investor annual limit (£100k → £200k).
Worked example (income tax relief + SEIS reinvestment relief + CGT-free growth)
Assume:
Investor realises a £150,000 gain in 2025/26 (taxed at 24% absent relief, ignoring any basic rate band availability).
Investor subscribes £100,000 for qualifying SEIS shares in the same tax year and receives SEIS3.
Income tax relief: £100,000 × 50% = £50,000 tax reducer.
SEIS reinvestment relief: up to 50% of the investment can exempt gains (subject to the cap rules), so £100,000 investment → £50,000 of gain exempt.
If the investor is a higher/additional-rate taxpayer, exempting £50,000 of gain at a 24% rate saves £12,000 of CGT (before considering use of the £3,000 AEA and other gains planning).
If, after 3+ years, the investor sells the SEIS shares for £200,000:
Gain on SEIS shares = £100,000
CGT on that gain = £0 (disposal relief), assuming SEIS income tax relief was received and not withdrawn and the holding period condition is satisfied.
How to claim / compliance
SEIS claims are also certificate-driven:
The company follows the SEIS compliance process and provides SEIS3 certificates to eligible investors.
Income tax relief is claimed through Self Assessment once SEIS3 is received; carry-back is handled via the certificate’s claim mechanism.
For SEIS reinvestment relief, the helpsheet sets out the Self Assessment CG pages mechanics (including using code “OTH” and providing a clear statement of the claim), with the claim form attached to the SEIS3 certificate.
Venture Capital Trusts
Purpose
VCTs provide a pooled, listed vehicle that invests in (or lends to) qualifying small companies, offering individual investors a package of reliefs intended to compensate for risk and illiquidity at the underlying portfolio level.
Who/what qualifies
VCT tax reliefs attach to ordinary shares in an approved VCT. Key distinctions:
The “front-end” income tax relief is available only to individuals (and only on subscriptions for new shares).
The dividend income tax exemption and CGT exemption on disposal are available to individuals generally, including when shares are acquired “second-hand” (for example on a market or by inheritance), but the up-front income tax relief is not.
Key tax benefits (rates, allowances, mechanics)
Reliefs available to individual shareholders include:
Front-end income tax relief: 30% of subscriptions up to £200,000 per tax year (holding period required to retain).
Dividend exemption: no income tax is payable on dividends from ordinary VCT shares. CGT exemption: no CGT is payable on disposals by individuals of ordinary VCT shares.
A crucial restriction: where disposal relief conditions are met, losses on the disposal of VCT shares are not allowable for capital gains purposes.
Holding periods and time limits
The investor must hold the shares for five years to avoid withdrawal of “front-end” income tax relief (for shares issued on or after 6 April 2006).
Time limit to claim: HMRC guidance states VCT income tax relief can be claimed up to 4 years after the end of the tax year in which the investment is made.
Interaction with other reliefs
Practically relevant interactions include:
using VCTs alongside EIS/SEIS - annual limits are separate;
recognising that VCT deferral relief is legacy only (not available for shares issued after 5 April 2004), but old deferred gains can be revived;
remembering that dividend tax rates rise from April 2026 for ordinary/upper rates (which increases the relative value of tax-free VCT dividends for many investors from 2026/27).
Common pitfalls and non-compliance risks
Typical issues are behavioural rather than technical:
expecting income tax relief when buying VCT shares second-hand;
selling within 5 years (triggering withdrawal of income tax relief);
subscribing above the annual limit and assuming all shares benefit from relief;
forgetting that losses on qualifying VCT shares are not allowable, which can be counterintuitive for private clients used to capital loss relief elsewhere.
Recent legislative/Budget changes to note
Two major policy developments are now central to VCT advice notes:
The EIS/VCT sunset clause extension to 6 April 2035 (providing scheme continuity).
From 6 April 2026, the VCT income tax relief rate reduces to 20% (from 30%), and at the same time the EIS/VCT company eligibility limits expand (gross assets threshold and annual/lifetime investment limits, with higher limits for knowledge-intensive companies).
Worked example (subscription, dividends, and CGT-free disposal)
Assume an investor subscribes £100,000 for new VCT shares in March 2026 (still 2025/26 tax year):
Income tax reducer: £100,000 × 30% = £30,000, assuming sufficient income tax liability.
Assume the VCT pays dividends averaging £6,000 a year. Those dividends are exempt from income tax; by comparison, a 2025/26 higher-rate taxpayer would normally pay dividend tax at 33.75% above the dividend allowance, so the tax saving on £6,000 can be around £2,025 per year (subject to the £500 dividend allowance and the investor’s other dividend income).
If the investor sells after 5+ years for £120,000, the £20,000 gain is CGT-free.
From 6 April 2026, a £100,000 subscription would instead generate £20,000 of income tax relief, reflecting the reduced 20% rate.
How to claim / compliance
The key compliance points are:
claim within the statutory time limit (up to 4 years after tax year end) and retain the VCT documentation;
avoid disposals within five years to prevent withdrawal of income tax relief; investors are also obliged to tell HMRC if relief should be withdrawn in the circumstances described in the VCT manual.
Investors’ Relief
Purpose
Investors’ Relief is a CGT relief for external investors (usually not employees or paid directors) who subscribe for shares in unlisted trading companies and hold them long-term.
Who/what qualifies
Key conditions include:
Shares must be ordinary shares, subscribed for in cash, fully paid up on issue.
The company must be trading (or holding company of a trading group) and not listed on a stock exchange (subject to technical definitions on what counts as “listed”).
Shares must have been issued on or after 17 March 2016 and disposed of on or after 6 April 2019.
Shares must be owned for at least 3 years up to disposal.
Relief is “not usually available” if the investor or connected persons are employees of the company; an unpaid director can sometimes still qualify.
Key tax benefits (rates, allowances, mechanics)
Investors’ Relief charges qualifying gains at a reduced rate, subject to a lifetime limit:
Lifetime limit is now £1 million for qualifying disposals made on or after 30 October 2024 (for disposals on or before 29 October 2024, the helpsheet notes the previous £10 million lifetime limit).
Rates: 14% applies in 2025/26; 18% from 6 April 2026 (announced/legislated).
Holding periods and time limits
Minimum holding period: 3 years.
Claim deadline follows the same “first anniversary of 31 January following the tax year” logic used for BADR (for 2024/25 disposal: 31 January 2027).
Interaction with other reliefs
Investors’ Relief is distinct from BADR and is targeted at non-employee investors; in many real-world situations, the investor may instead be looking at EIS/SEIS/VCT reliefs (which deliver income tax relief and/or broader CGT mechanics) if the investment qualifies.
CGT reorganisations and elections can affect when gains are treated as arising; the CGT rate change notes include specific provisions for elections connected with claiming Investors’ Relief.
Common pitfalls and non-compliance risks
Typical issues include:
becoming an employee or paid director (personally or via connected persons) during the holding period;
receiving value from the company (which can taint the shares’ qualifying status);
missing the fact that the lifetime limit for disposals from 30 October 2024 is now £1m; not meeting the 3-year holding period.
Recent legislative/Budget changes to note
The two central Investors’ Relief changes are:
lifetime limit reduction from £10m to £1m for qualifying disposals on or after 30 October 2024;
rate increases aligned with BADR: 14% in 2025/26, 18% from 6 April 2026.
Worked example (rate benefit + lifetime cap impact)
Assume an external investor realises a £1,000,000 qualifying gain on shares in 2025/26:
Investors’ Relief CGT at 14%: £140,000
Main-rate CGT (higher/additional rate) at 24%: £240,000
Indicative saving: £100,000
This “10 percentage point gap” is explicitly implied by the published main CGT rates and the Investors’ Relief rate for 2025/26.
From 6 April 2026, the Investors’ Relief rate rises to 18%, narrowing the rate gap versus 24%.
How to claim / compliance
Claims are made through Self Assessment (or in writing) by the deadline described above. HMRC’s Investors’ Relief helpsheet refers users to the Capital Gains Manual sections CG63500–CG63644 for deeper technical detail.
R&D tax relief
Purpose
R&D tax reliefs are designed to incentivise R&D investment by companies by reducing the effective after-tax cost of qualifying R&D. For entrepreneurs, the relief directly affects cash runway; for investors, it can influence burn rate, fundraise timing, and ultimately valuation.
Who/what qualifies (and which scheme applies)
For accounting periods beginning on or after 1 April 2024, the default regime is the merged R&D expenditure credit scheme, with a separate Enhanced R&D intensive support (ERIS) available to qualifying loss-making R&D‑intensive SMEs.
Merged scheme (RDEC-style):
Can be claimed by companies that are trading, within Corporation Tax, and have projects meeting the definition of R&D; the credit is taxable as trading income.
ERIS:
Available only to loss-making R&D intensive SMEs, and provides both an enhanced deduction and a payable credit; there are additional restrictions in particular contexts (including for companies registered in Northern Ireland for certain aspects).
Both schemes include restrictions on some overseas expenditure, and both are subject to the PAYE cap framework (with defined calculation and exemptions).
Key tax benefits (rates, allowances, mechanics)
Merged scheme:
Expenditure credit rate is 20% of qualifying costs.
The credit is taxable (treated as trading income), so the net benefit depends on the Corporation Tax rate profile, including marginal relief considerations.
ERIS:
Additional deduction of 86% of qualifying costs, producing a total 186% deduction (100% in accounts plus 86% uplift).
Payable tax credit up to 14.5% of the surrenderable loss, not liable to tax.
Holding periods and time limits (claim windows)
R&D is not an “asset holding” relief, but recent reforms tightened process and timeframes:
Claim notification: for certain companies (notably first-time claimants and those outside the recent-claim window), HMRC requires a claim notification form within a notification period ending 6 months after the end of the period of account.
Mandatory additional information form: must be submitted before or on the same day as the CT600, and if submitted on the same day, it must be sent before the return - otherwise the R&D claim is rejected/removed.
Time limit: reforms changed the time limit to two years from the end of the period of account to which the claim relates.
Interaction with other reliefs
Companies eligible for ERIS can elect instead to claim under the merged scheme, but cannot claim both for the same expenditure.
Patent Box frequently interacts with R&D because Patent Box benefit calculations can be restricted via the “R&D fraction” (nexus) rules noted in the Patent Box guidance.
Common pitfalls and non-compliance risks
As a matter of current compliance culture, there are three “high-risk” operational points:
missing pre-notification where required (removing the ability to claim);
failing to submit the additional information form correctly/timely (triggering claim rejection/ removal);
overstating qualifying activities or costs, particularly around subcontracting and overseas work (where April 2024 rule changes introduced restrictions).
Recent legislative/Budget changes to note
The core changes that should be clearly explained in any blog post aimed at founders/CFOs are:
the merged scheme and ERIS replacing the old SME/RDEC split for periods beginning on or after 1 April 2024;
the mandatory additional information form and its sequencing requirement relative to CT600 submissions;
the claim notification process and 6‑month notification period mechanics; the two-year “period of account” time limit.
Worked examples (merged scheme and ERIS)
Merged scheme illustration: a company incurs £100,000 of qualifying R&D costs in an accounting period.
Gross credit: 20% × £100,000 = £20,000
If the company pays Corporation Tax at 25% (main rate), and the credit is taxable as trading income, an indicative “net” benefit is £20,000 × (1 − 25%) = £15,000.
ERIS illustration (maximum-style framing): for a loss-making R&D-intensive SME with £100,000 qualifying costs:
Total deduction can be 186%, i.e. potentially £186,000 of deduction against profits/loss computation;
Payable credit can be up to 14.5% of surrenderable loss—if surrenderable loss is driven by the 186% deduction, this can imply a payable credit up to approximately £26,970 (14.5% × £186,000), an “order of magnitude” ~27% of the cost base in this stylised scenario.
How to claim / compliance (process)
A robust process typically looks like:
Confirm whether the accounting period is pre- or post-1 April 2024 to identify the correct scheme.
If required, submit the claim notification within the defined notification period.
Prepare technical and cost documentation and submit the additional information form before (or on the same day but earlier than) filing CT600.
Submit the claim within the statutory time limit (two years from the period of account end).
Patent Box
Purpose
Patent Box encourages companies to retain and commercialise IP by allowing a lower effective Corporation Tax rate on profits attributable to patented inventions and certain similar rights.
Who/what qualifies
A company can benefit if it:
is within Corporation Tax;
makes profits from exploiting patented inventions;
owns or exclusively licenses-in the patents; and
has undertaken qualifying development on the patents (significant contribution to the invention or product incorporating it).
Qualifying patents include patents granted by the UK Intellectual Property Office and the European Patent Office (and specified other jurisdictions in the guidance).
If a company elected into Patent Box after 30 June 2016, benefits are restricted where the company incurred acquisition costs or made payments to connected parties for R&D expenditure; this is reflected via the “R&D fraction” in the Patent Box calculation.
Key tax benefits (rates, allowances, mechanics)
Patent Box applies an effective 10% tax rate to relevant patent profits, achieved through a specific deduction that reduces profits so the reduced rate applies.
With the main Corporation Tax rate at 25% (and small profits rate 19%), the headline “spread” between 25% and 10% can be substantial where significant profits are within the Patent Box stream.
Holding periods and time limits (elections)
Patent Box is elective:
You must elect into the Patent Box within 2 years after the end of the accounting period in which the relevant profits and income arose; election can be made in computations accompanying the Company Tax Return or separately in writing, and there is no special form of words or a dedicated box on the return.
Interaction with other reliefs
For innovative growth companies, the key interaction is with R&D:
Patent Box eligibility and quantum can be affected by the R&D fraction/nexus approach - R&D performed and tracked in the company (rather than purchased/acquired) tends to support a stronger fraction under the post‑2016 rules.
R&D tax relief and Patent Box are not mutually exclusive: one subsidises innovation spend; the other reduces tax on commercialised outputs from qualifying IP.
Common pitfalls and non-compliance risks
Missing the 2-year election deadline (a frequent “silent failure” if not diarised).
Underestimating calculation complexity (streaming, notional royalties, and nexus fraction considerations), leading to delayed or disputed claims.
Assuming any IP or “innovation” qualifies—Patent Box is patent/right-specific and linked to profits from exploiting those rights.
Recent legislative/Budget changes to note
No major structural changes to Patent Box are flagged in current primary guidance; however, the increase in Corporation Tax to the 25% main rate has increased the relative value of a 10% Patent Box effective rate for many companies.
Worked example (profit-based)
Assume a company has £100,000 of qualifying Patent Box profit in an accounting period, and is paying Corporation Tax at the 25% main rate:
Tax without Patent Box: £100,000 × 25% = £25,000
Tax at Patent Box effective rate: £100,000 × 10% = £10,000 Indicative saving: £15,000
This compares the headline 10% Patent Box rate with the published main Corporation Tax rate.
How to claim / compliance
The practical compliance steps are:
make a timely election (within 2 years after the accounting period);
compute the Patent Box deduction in the corporation tax computation stream, consistent with HMRC’s calculation guidance (including streaming and notional royalty approaches where relevant);
maintain records linking patents, products/services, and profit streams, especially where the post‑2016 nexus restrictions apply.
Case studies with worked numbers
Entrepreneur exit using BADR
Scenario:
A shareholder-founder sells shares in a personal trading company in March 2026 (2025/26). They meet the “personal company” 5% tests, are an officer/employee, and the 2-year qualifying period is satisfied.
Numbers
Gain realised: £1,200,000
AEA (2025/26): £3,000
BADR lifetime cap: £1,000,000
Rates: main CGT (higher/additional) 24%; BADR 14% in 2025/26.
Result:
CGT with BADR: £187,280
CGT without BADR: £287,280
Saving: £100,000
Planning note:
If the same disposal were delayed into 2026/27, the BADR rate is due to be 18%, reducing the rate advantage and therefore the tax saving (all else equal).
Angel investor using SEIS and EIS
Scenario:
A UK-resident investor makes two investments in 2025/26:
£100,000 SEIS subscription into an early-stage qualifying company;
£100,000 EIS subscription into another qualifying company later in the year.
They have sufficient UK income tax liability to use the reliefs immediately.
Immediate income tax reducers
SEIS income tax relief: £100,000 × 50% = £50,000
EIS income tax relief: £100,000 × 30% = £30,000
Total immediate income tax reduction: £80,000 (limited by the investor’s income tax liability).
CGT impact (SEIS reinvestment relief illustration)
Assume the investor also realises a £150,000 chargeable gain in 2025/26 and reinvests into the SEIS shares in the same year. Under SEIS reinvestment relief mechanics, £50,000 of that gain can be exempt (50% of the £100,000 SEIS investment), subject to the cap rules and AEA interaction.
If the investor would otherwise pay CGT at 24%, exempting £50,000 of gain saves £12,000 of CGT (before considering the AEA and broader gains position).
Exit gains on the SEIS/EIS shares
If both investments are held for at least 3 years and income tax relief is not withdrawn:
Gains on SEIS share disposal can be exempt (SEIS disposal relief).
Gains on EIS share disposal can also be exempt (EIS disposal relief).
Risk downside (loss relief reminder)
If either investment fails, the investor’s loss relief position differs materially from a standard share investment because the allowable loss is reduced by income tax relief given (and the investor may be able to set net losses against income for EIS/SEIS).
Investor using a VCT
Scenario:
A higher-rate taxpayer subscribes £100,000 for newly issued VCT shares in March 2026 and holds them at least 5 years.
Immediate tax relief
30% front-end income tax reducer in 2025/26: £30,000 (subject to sufficient tax liability).
Income stream
Assume tax-free dividends average £6,000/year.
VCT dividends are income tax-free.
Standard dividend tax (higher rate) is 33.75% in 2025/26, so the “tax shield” can be material where the investor has already used the £500 dividend allowance.
Capital exit
If shares are sold for £120,000 after 5 years:
20,000 gain is CGT-free (VCT disposal relief).
Forward-looking note
From 6 April 2026, the up-front income tax relief rate will be 20% for VCT subscriptions, reducing the immediate income tax reducer (e.g., £100,000 subscription → £20,000 relief).