For business owners, Business Asset Disposal Relief has long been the single most valuable relief in the tax system, the difference between a 10% and a 20% rate on the largest transaction of your working life. It is still valuable. It is markedly less generous than it was, and the conditions are unchanged and unforgiving, which makes planning ahead more important, not less.
What BADR does
BADR (formerly Entrepreneurs' Relief) reduces the rate of Capital Gains Tax on qualifying disposals of a business or of shares in your personal trading company, subject to a lifetime limit of £1 million of qualifying gains. Gains above the limit are taxed at the normal CGT rates.
The rate has moved twice
This is the headline change and it caught many owners mid-process:
- 10% for disposals before 6 April 2025;
- 14% for disposals on or after 6 April 2025;
- 18% for disposals on or after 6 April 2026.
On a full £1 million of qualifying gains, the relief was worth £140,000 against the main higher rate when it stood at 10%. At 18% against a 24% main rate, it is worth £60,000. Still meaningful, materially less than it was, and no longer large enough to justify contorting a commercial deal around it.
HMRC also operates anti-forestalling rules covering unconditional contracts entered into before a rate change and certain elections on share exchanges, designed to stop disposals being papered early to lock in an old rate. Arrangements structured around the rate changes need to be able to withstand that scrutiny.
The qualifying conditions
For a disposal of shares, all of the following must have been satisfied throughout the two years ending with the disposal:
- The company is a trading company (or the holding company of a trading group);
- It is your personal company: you hold at least 5% of the ordinary share capital and 5% of the voting rights, and are entitled to at least 5% of the distributable profits and assets on a winding up, or 5% of the proceeds on a sale of the whole company;
- You are an officer or employee of the company or group.
Two years is the part people underestimate. A shareholding created, or a directorship resigned, shortly before a sale can put the relief out of reach entirely, and by the time an offer is on the table there is no way to manufacture the missing history.
Where BADR is lost
- Trading status. A company with substantial non-trading activity, typically surplus cash or an investment property portfolio built up inside the trading company, can fail the trading test. This is the most common cause of a nasty surprise, and it develops gradually over years of retained profits.
- Dilution below 5% on an investment round. There is an election that can preserve relief accrued up to the point of dilution, but it must be made.
- Resigning too early. Stepping back from the board before completion breaks the officer-or-employee condition.
- Share classes without full rights. Growth shares and some alphabet arrangements can fail the 5% economic tests even where the percentage of share capital looks right.
- Associated disposals of personally held property used by the business are restricted where the company has been paying you a market rent, an awkward interaction with the rent-based extraction route that is worth modelling in advance.
Planning that actually helps
- Start the two-year clock early. If shares need to move, particularly to a spouse or family member, do it well ahead of any sale process.
- Use both spouses' limits. The £1 million lifetime limit is per person. A spouse who genuinely holds 5%, is an officer or employee, and has held that position for two years has their own limit, potentially doubling relieved gains.
- Watch the cash pile. Extract or invest surplus cash so the trading test is not jeopardised, this is a multi-year discipline, not a pre-sale fix.
- Check the share rights against all four limbs of the personal company test, not just the headline percentage.
The relief follows the preparation
BADR is decided by the structure you have in place two years before you sell, not by the negotiation. That is the same argument we make in our guide to exit readiness: the value of a business at sale is set long before anyone is at the table. We advise on shareholding structure, trading status and disposal timing through our tax planning and business advisory services. If a sale is anywhere on your horizon, even three or four years out, book a review now, that is when it is still fixable.