Business Asset Disposal Relief (BADR) Explained

The Relief That Kept Its Name and Lost Its Value

Business Asset Disposal Relief, still called Entrepreneurs' Relief by most people who have owned a business for more than a decade, reduces the Capital Gains Tax rate when you sell or wind up a business you have built.

For disposals made on or after 6 April 2026, the BADR rate is 18 percent, on gains up to a £1 million lifetime limit. It was 14 percent for 2025/26 and 10 percent for everything before 6 April 2025.

Almost every guide to this relief leads with the £1 million. It is the wrong number to lead with, because it is the only figure in the whole regime that has not moved since March 2020. Everything around it has changed, and the direction has been one way.

This guide covers the conditions properly, including the three separate 5 percent tests that catch more owner-managed companies than anything else, and then does the arithmetic that shows what the relief is now worth. In a fair number of cases the honest answer is nothing.

What BADR Is Worth in 2026/27

The standard Capital Gains Tax rates for 2026/27 are 18 percent where your gains and income fall inside the basic rate band, and 24 percent above it. BADR charges 18 percent flat.

So the relief saves a maximum of 6 percentage points. On the full £1 million lifetime limit, that is £60,000 of tax.

Here is the same relief over six years.

Tax year	BADR rate	Lifetime limit	Standard higher rate	Maximum tax saved
2019/20	10%	£10 million	20%	£1,000,000
2020/21	10%	£1 million	20%	£100,000
2025/26	14%	£1 million	24%	£100,000
2026/27	18%	£1 million	24%	£60,000

The maximum value of the relief has fallen by about 94 percent since 2019/20. Two separate cuts did the work. The lifetime limit dropped from £10 million to £1 million on 11 March 2020, which took out 90 percent of it in a single Budget. Then the rate climbed from 10 percent to 14 percent to 18 percent while the standard higher rate rose only once, from 20 percent to 24 percent on 30 October 2024, so the gap between the relieved rate and the normal one narrowed from ten points to six.

This matters because of how the relief is described. The lifetime limit is the number in the headline, on the GOV.UK page, and in the first paragraph of almost every article about it. It has been frozen since March 2020, which makes it look like a settled, stable relief. The part that actually determines what you save has been cut twice in eighteen months, and it gets a sentence near the bottom.

If you built a company between 2015 and 2020 with an exit in mind, the relief you were planning around no longer exists in any meaningful sense. That is not a reason to panic about a sale. It is a reason to stop treating BADR as the centrepiece of an exit plan, because on a £400,000 gain it is now worth £24,000, which is real money but is no longer the thing that decides how or when you sell.

Who Qualifies

There are two routes in, and they have different conditions.

Sole traders and partners

You qualify if you have owned the business for at least two years before you sell it, and you are disposing of all or part of the business rather than individual assets picked out of a continuing trade.

That distinction trips people up. Selling the machinery out of a workshop that carries on trading is not a disposal of part of a business. Selling the workshop, the goodwill, the customer list and the contracts as a going concern is.

If you have stopped trading rather than sold up, you can still claim on the business assets, but you must dispose of them within three years of the trade ceasing.

Company shareholders

For shares, the company must be your personal company and a trading company or the holding company of a trading group, and you must be an employee or officer of it. All three conditions, and the personal company tests below, have to be met throughout the two years ending on the date of disposal.

There is no minimum hours requirement for the employment test. An unpaid directorship counts. What does not count is having resigned as a director eighteen months before the sale because someone thought it looked tidier.

The personal company test has three limbs, and this is where most failures happen.

1. You hold at least 5 percent of the ordinary share capital by nominal value.
2. You hold at least 5 percent of the voting rights.
3. Either you are beneficially entitled to at least 5 percent of distributable profits and 5 percent of assets on a winding up, or, as an alternative test introduced after the rules were tightened in late 2018, you would be entitled to at least 5 percent of the proceeds if the whole of the ordinary share capital were sold at market value.

Limbs one and two are easy to check on a share certificate. Limb three is not, and it is the one that catches ordinary small companies.

Alphabet Shares Are the Most Common Way to Fail

A great many UK companies have A, B and C ordinary shares. They were usually created so that dividends could be voted at different amounts to different shareholders, which is a legitimate and useful arrangement for a family company. We set these structures up ourselves.

The problem is that alphabet shares are almost always designed around income flexibility and almost never around exit. If the articles say that dividends on each class are at the directors' discretion with no fixed entitlement, and say nothing about how capital is shared on a winding up, then the third limb of the personal company test is a genuine question rather than a formality.

The proceeds alternative introduced in 2019 was a direct response to this, and it rescues many cases. It does not rescue all of them, particularly where a class carries no meaningful capital rights at all or where there are growth shares, options or an investor with a preference sitting above the ordinary shares in the waterfall.

Our practical position is simple. If your company has more than one class of ordinary share and you might sell within a few years, get somebody to read the articles against all three limbs now, while there is still time to do something about it. Fixing the share structure creates its own tax questions and takes time, and any fix has to be in place for two years before it does you any good. Discovering the problem during due diligence is discovering it too late.

The Two Year Clock Runs the Whole Thing

Nearly every condition above has to hold for two years ending on the day of disposal. That single sentence does more damage than the rate increases, because almost every sensible-looking pre-sale tidy-up restarts it.

Things that commonly break the two year period:

• Transferring shares to a spouse shortly before a sale. Spouse transfers pass at no gain and no loss for CGT, so the gain moves. The BADR qualifying period does not move with it. The recipient has to meet the conditions in their own right for two years.
• Resigning as a director in the run-up to a deal. The employee or officer test has to be met on the day of disposal too.
• Incorporating a sole trade shortly before selling. The shares are new, so the share clock starts from scratch even though the underlying business is twenty years old.
• A reorganisation, share for share exchange or new holding company inserted to make the structure look neater for a buyer.
• Dropping below 5 percent because a funding round diluted you, or because an option pool was created.

The two year rule means that the useful BADR planning window opened two years before you decided to sell. That is an uncomfortable thing to tell someone who is mid-negotiation, and it is why we raise it with clients who have no intention of selling anything.

Doubling the limit, if you plan far enough ahead

The lifetime limit is per person, not per business or per company. A married couple who both qualify have £2 million between them.

That is worth £60,000 of tax on a £2 million gain, and it is the single largest planning point in the relief. It is also the one that most often arrives too late, because it needs the spouse to hold 5 percent of shares and votes, to satisfy the economic ownership limb, and to be an employee or officer, for the full two years. A share transfer signed the month before completion moves the gain, saves nothing under BADR, and may have been better done for other reasons entirely.

The Trading Company Test, and Why Cash Is the Risk

To qualify on a share disposal, the company must be trading, and its activities must not include non-trading activities to a substantial extent.

HMRC's own manual is honest that there is no formula. It says to look at income from non-trading activities, the split of the asset base, where expenses and staff time go, and the company's history over a period rather than a snapshot. It then offers a rule of thumb: where none of those indicators suggests the non-trading element exceeds 20 percent, the case is unlikely to need a closer look.

That 20 percent is a review threshold, not a statutory test, and recent case law has made clear it should not be treated as a bright line. But it is the number in the manual, and it is the number that will be applied to your balance sheet.

Here is the part that nobody puts next to it.

A great many owner-managed companies carry a large cash balance, because the owner has drawn a modest salary, taken limited dividends, and left the rest in as retained earnings. At current dividend rates, that is a rational thing to do year on year. Cash in the company has not been taxed at 35.75 percent yet, and might never be if the company is eventually wound up.

Cash held as a war chest for the trade is generally fine. Cash that has visibly become an investment reserve, sitting alongside a rental property the company bought, or a portfolio, or a director's flat, is exactly what the substantial non-trading test is looking at. The asset base indicator is measured on the balance sheet, and a company with £900,000 of trading assets and £400,000 of investment property has a problem that no amount of trading activity fixes.

So there is a real tension here, and it runs in the opposite direction to the usual advice. Leaving profits in the company is tax-efficient annually and can be expensive once. The annual saving is visible every year. The cost is a single event, years later, when a £400,000 gain is taxed at 24 percent instead of 18 percent, or when a buyer's lawyers find the problem and the price moves.

We are not suggesting anybody strips their company of working capital to protect a relief worth six points. We are suggesting that if a company has quietly accumulated assets that have nothing to do with the trade, the exit consequence should be on the table when that decision is reviewed, and in our experience it almost never is. A separate investment company is usually the answer, and like everything else in this relief, it wants doing two years early.

Associated Disposals

If you personally own an asset that the business uses, most often the trading premises, and you sell it at the same time as you withdraw from the business, the gain on that asset can qualify too. This is an associated disposal.

The conditions are tighter than people expect:

• You must be making a material disposal of at least 5 percent of your partnership interest or of the shares, and it must represent a genuine withdrawal from the business rather than a small sale alongside carrying on.
• The asset must have been used in the business for at least two years.
• The asset must generally have been owned for at least three years.
• If you charged the business rent for the asset, the relief is restricted in proportion to the rent charged, for periods from 6 April 2008 onwards.

That last one produces the unhappiest conversations in this whole area. A director who owns the warehouse personally and charges the company a full market rent has been doing something perfectly sensible for income tax and corporation tax purposes for fifteen years, and has been reducing the BADR available on the warehouse the entire time. Charging no rent preserves the relief but wastes a corporation tax deduction each year. There is no arrangement that gets both, and which one wins depends on the numbers and the time horizon. What you should not do is make that choice by accident, which is what happens when nobody ever mentions the interaction.

Selling Up After You Have Stopped Trading

A company that has ceased trading is no longer a trading company, so it stops satisfying the test. There is a concession: you can still qualify if you dispose of the shares within three years of the company ceasing to trade.

This is the single most commonly lost version of the relief we see, because it is lost by doing nothing. A director stops trading, leaves the company sitting there with money in it while they decide what to do next, and closes it four years later. The 18 percent rate has gone by then. Our guides to how to close a limited company and dormant companies cover the closure routes and the tax on getting the money out, including where the £25,000 strike-off limit does and does not matter.

If there is a company in your life that stopped trading and still holds cash, the clock started on the day the trade stopped, not on the day you got round to thinking about it.

How and When to Claim

BADR is a claim, not an automatic relief. Nothing happens unless you make it.

You claim through your Self Assessment tax return, or by completing Section A of HMRC's HS275 helpsheet and sending it in. The deadline is the first anniversary of the 31 January following the end of the tax year of disposal. So for a disposal in 2026/27, the claim has to be made by 31 January 2029.

Two mechanical points that change the tax and rarely get explained.

The annual exempt amount goes against your highest-rate gains first. The £3,000 exemption for 2026/27 is more valuable set against a 24 percent gain than an 18 percent one, so if you have both, it is applied to the 24 percent gain.

BADR gains use your basic rate band before your other gains do. The BADR gain is taxed at 18 percent whatever band it falls in, but it still consumes whatever is left of your basic rate band, which pushes your non-BADR gains up into the 24 percent rate sooner. If you are disposing of more than one asset in a year, that ordering rule is worth modelling rather than assuming.

Three Worked Examples

A company sale by a higher rate taxpayer. You sell your shares for a gain of £400,000. You have used your annual exempt amount elsewhere and you are a higher rate taxpayer. With BADR, the tax is £400,000 at 18 percent, or £72,000. Without it, £400,000 at 24 percent, or £96,000. BADR saves £24,000.

The same sale in 2023/24 would have cost £40,000 in tax with the relief, against £80,000 without. So the tax on this sale has risen by £32,000 in three years, and the relief itself is worth £16,000 less than it was.

A small sale where BADR is worth nothing. You sell a sole trade business you have run for six years. The gain is £28,000. Your other income for the year is £20,000, so you have £30,270 of basic rate band left. After the £3,000 annual exempt amount, £25,000 is chargeable. It fits inside the band, so the standard rate on it is 18 percent, and the BADR rate is also 18 percent. The tax is £4,500 either way. The relief saves you nothing at all.

Which raises a question almost nobody asks. BADR is optional, and the lifetime limit tracks the gains you claim it on. If a claim saves you nothing this year and you might build and sell something considerably larger later, there is an argument for not making the claim and keeping the allowance intact. We would want to look at the specific facts before doing that, because it is a permanent decision made on an uncertain forecast, and the claim deadline gives you until 31 January nearly two years later to decide. But it is a real choice, and being told to "always claim the relief" is not advice, it is a reflex.

A couple who planned three years out. A company is sold for a gain of £1.6 million. Held in one name, that is £1 million at 18 percent and £600,000 at 24 percent, or £324,000. Held 50/50 by a couple who both satisfied every condition for two full years, it is £800,000 each, entirely within each person's own £1 million limit, at 18 percent, or £288,000 between them. The difference is £36,000, and it was decided two years before anyone signed anything.

Where This Sits Alongside the Other Exit Reliefs

BADR is not the only relief in play when a business changes hands, and the others have been moving too.

Investors' Relief, which applies to certain unlisted shares held by outside investors who are not employees, now runs on the same 18 percent rate and had its own lifetime limit cut from £10 million to £1 million for disposals from 30 October 2024. It has been reduced harder and faster than BADR and gets almost no attention.

Employee Ownership Trusts were, until recently, the cleanest answer to BADR's erosion. A qualifying sale of a controlling interest to an EOT was entirely free of Capital Gains Tax. From 26 November 2025, only 50 percent of the gain gets that treatment, with the other half chargeable, and BADR and Investors' Relief cannot be used on an EOT sale in any case. The relief had cost far more than the 2013 costing anticipated, and it was cut accordingly.

Business Property Relief is the inheritance tax side of the same coin, and moves in the opposite direction at the moment. Our guide to inheritance tax covers the £2.5 million allowance that applies from 6 April 2026, a figure a lot of published advice still states as £1 million.

The pattern across all of these is worth naming: within eighteen months, the two main reliefs for selling a business to a third party or to your own employees have both been cut, while the relief for dying while still owning it has been left comparatively generous. Whatever the intention, the current settlement taxes the entrepreneur who sells more heavily than the one who holds.

Will BADR Be Scrapped?

It is one of the most searched questions about the relief, and it deserves a straight answer rather than a hedge.

Nobody outside the Treasury knows. What can be said is that the direction of travel has been consistent for six years, that the Office of Tax Simplification and the Institute for Fiscal Studies have both questioned whether the relief changes behaviour enough to justify its cost, and that £10 million to £1 million and 10 percent to 18 percent are not the actions of a government attached to it.

Our reading is that outright abolition is less likely than the alternative, which is simply aligning the BADR rate with the main 24 percent rate and letting the relief lapse into irrelevance without a headline. That is the cheaper political move, and at six points of difference the distance left to travel is short.

What follows from that, practically:

Do not accelerate a sale for tax reasons alone. A business sold badly to beat a Budget loses more than the relief was ever worth. We have watched people take a discount on price that dwarfed the tax they were avoiding.

But do take the deadline seriously if a sale is already happening. Rate changes here have applied from 6 April, and the date that counts for CGT is generally the date of the contract rather than completion. Anti-forestalling rules introduced at Autumn Budget 2024 already target contracts and elections used to lock in an older rate, so this is not an area to be clever in. If you are exchanging close to a tax year end, get the dates checked.

Use the relief you have. A £1 million lifetime allowance that expires unused is worth nothing. If you have two businesses, or a spouse who qualifies, or a phased exit, the sequencing is worth thinking about now rather than at the end.

Our View

The headline number is doing the work of hiding the change. Every summary of this relief leads with £1 million because it is the biggest figure available, and it happens to be the one number that has been frozen since 2020. Leading with it makes a relief that has lost most of its value look stable. If BADR were described honestly it would be introduced as "a six point discount on Capital Gains Tax, capped at £60,000 of tax over your lifetime". That is still worth having. It is not worth reorganising a business around.

The relief is won or lost two years before the sale, which makes it a bookkeeping and governance problem rather than a tax one. Every disqualifier we have described is something that gets decided in a routine conversation years earlier. Who is on the board. Whether there are B shares. Whether the property is in the company or outside it. Whether the spare cash bought a flat. None of those decisions feel like tax decisions at the time, and by the time anyone calls a tax adviser the answers are already fixed. That is why we check share structures for clients who are not selling anything.

It saves basic rate taxpayers nothing, and hardly anyone has noticed. From 6 April 2026 the BADR rate and the standard basic rate CGT rate are the same 18 percent. For someone with modest other income selling a small business, the relief is now worth precisely zero, while still consuming a once-in-a-lifetime allowance if claimed. For a relief whose stated purpose is to encourage people to build and sell businesses, being worth nothing to the smallest sellers is an odd place to have ended up.

The annual and the once-off pull against each other, and the annual always wins by default. Leaving profits in the company, charging the company rent for premises you own, and holding investments inside the trading entity are all defensible year-to-year decisions that quietly reduce or destroy a relief you will claim once. The annual saving is visible in every set of accounts. The exit cost appears in a single line, once, years later, and almost always in a conversation that starts with somebody saying they wish they had known.

How IAK Can Help

We advise owner-managed businesses across North London and Hertfordshire on how to sell, wind down or hand over a company without paying more tax than the rules require.

For limited companies, that means reading your articles and share register against all three limbs of the personal company test, checking the trading company position where there is cash or property on the balance sheet, and getting any restructuring in place with the two year clock in mind rather than against it. For sole traders and partners, it means making sure the disposal is structured as a business rather than a pile of assets, and that the associated disposal conditions on any premises you own personally are met.

When the sale happens, our personal tax team works out the gain, sets the annual exempt amount and the basic rate band against the right gains in the right order, and makes the claim on the return so nothing is left to the deadline. Our tax planning service does the part that matters more, which is the work two or three years earlier.

If you are thinking about selling, winding up, or bringing family into the shareholding, get in touch for a free consultation. Our Capital Gains Tax calculator will give you a quick estimate in the meantime, and our guide to valuing a business covers the other half of the question.

Sources

• Business Asset Disposal Relief: Eligibility, GOV.UK, for the 10, 14 and 18 percent rates by disposal date, the two year conditions for sole traders, partners and shareholders, the 5 percent tests, the three year window after a business closes and the associated disposal conditions.
• HS275 Business Asset Disposal Relief, GOV.UK, for the lifetime limit history including the reduction from £10 million to £1 million on 11 March 2020, the claim deadline of the first anniversary of the 31 January following the tax year, the treatment of the annual exempt amount, associated disposals and the restriction where rent has been charged.
• CG64090: substantial extent, HMRC Capital Gains Manual, for the indicators used in the trading company test and the 20 percent rule of thumb for whether a case warrants detailed review.
• Capital Gains Tax rates and allowances, GOV.UK, for the 18 percent and 24 percent main rates and the £3,000 annual exempt amount for 2026/27.
• Capital Gains Tax: rates, BADR and Investors' Relief, Deloitte Taxscape, for the Autumn Budget 2024 rate timetable, the reduction of the Investors' Relief lifetime limit to £1 million from 30 October 2024 and the anti-forestalling rules on contracts and elections.
• Business Asset Disposal Relief (BADR): complete guide, Saffery, for the detail of the alternative 5 percent proceeds test, the EMI share exception and the employment condition.
• CGT relief on Employee Ownership Trusts, Deloitte Taxscape, for the reduction of EOT relief from 100 percent to 50 percent of the gain for disposals from 26 November 2025.
• Capital gains tax: recent developments, House of Commons Library, for the history of the relief and the policy debate about whether it changes behaviour.