The new capital gains tax incentive Chancellor John Healey unveiled in his Budget may benefit LLP firms in the professional services sector if they qualify, but it also risks disrupting partner dynamics within the firms.

Healey announced the so-called ‘Founder’s Relief’ capital gains tax (CGT) incentive in his Budget speech on Wednesday in a bid to keep companies operating in the UK, which he said is a 10 per cent rate on lifetime gains of up to £10m “for the founders of our most successful firms”.

It has not yet been confirmed which firms qualify for the incentive, which is due to be introduced next April after a consultation, but some experts have raised questions over whether LLPs, which many professional services firms are, may be included, and how this could impact them.

The limited liability partnership (LLP) model came into force over 25 years ago and is used by many firms across the sector, including law firms, accountancy practices, and some doctors. In this structure, members, known as partners, invest their own capital, take on the risk, and, in return, do not pay corporate tax on their profits.

“The introduction of new tax reliefs for founders of 10 per cent rates for capital gains up to a limit of £10m will be welcomed by founders. The proposed consultation will need to provide clarity on what it means to be a ‘qualifying founder of a high-growth, innovative companies’ before it is introduced on 6 April 2027. Presumably all founder-led body corporates, including LLPs, will qualify,” Corinne Staves, partner at CM Murray, said.

Staves added that, as it is a capital gains tax relief, it “first requires the law firm founders to dispose of their business or interests in the business”, which “is at odds with the traditional ‘naked-in, naked-out model’ for law firms which until recently has been the bedrock of much of the legal services sector.”

“This could impact on the dynamics between different generations of partners in founder-led firms, but it is probably good news for private equity and other external investors who are actively looking to acquire interests in successful law firms with ambitious growth plans,” Staves said.

Angus Milledge, head of new business sales at SAP Concur, said the relief incentive, alongside rate cuts, “are welcome steps in the right direction and continued support for high-growth sectors, including technology, financial services, and professional services, will be crucial in maintaining the UK’s competitiveness and growth ambitions.”

“As startups and fintechs weigh up where to grow, invest and create jobs, measures that encourage innovation, investment and entrepreneurship will ensure the UK remains a place where businesses can scale, succeed and build their futures,” Milledge said.

Danny Blum, partner and head of employee incentives at Eversheds Sutherland, said the Founder’s Relief proposal “will hopefully introduce new motivation to entrepreneurs and investors to create and invest in new high growth companies.”

LLPs spared of tax hikes ‘a relief’

The professional services sector can breathe a sigh of relief as Healey’s Budget spared LLPs from tax hikes.

This follows rumours in the lead-up to Rachel Reeves’ Budget last year that the former Chancellor was keen to consider taxing LLP firms, before then rolling back on the plans following sector-wide lobbying against the move. It had remained unclear whether Chancellor Healey would impose them this time round.

“The Chancellor’s decision not to target LLPs in today’s Budget will come as a relief to the UK’s legal and professional services sector,” Alexandra Ueno-Park, partner at Haynes Boone, said.

She added the move “risked undermining the UK’s competitiveness, discouraging investment, increasing compliance burdens and making rival hubs such as New York and Singapore more attractive destinations for top talent.”

“There will be a sigh of relief within the big accountancy, law and financial services firms that there has been no further statutory measures in the Budget to either restrict the number of qualifying partners in an LLP or impose employer NIC charges on members profits,” Sean Drury, head of tax at Blick Rothenberg, said.

“It was clear that under Rachel Reeves’ chancellorship there was increasing focus on the use of LLP’s, but with only one positive reference in the red book this scrutiny seems to have disappeared under John Healey,” he added.