What Is Business Asset Disposal Relief?

Business Asset Disposal Relief (BADR) cuts the Capital Gains Tax rate on qualifying business asset disposals to 14% for the 2025/26 tax year. That rate rises to 18% from 6 April 2026. Without the relief, the standard CGT rate on business assets is 18% for basic rate taxpayers and 24% for higher rate taxpayers.

For a company director selling their shares, the difference between 14% and 24% on a £1 million gain is £100,000. That is not a rounding error. It is the difference between a comfortable retirement and a significant tax bill.

The relief has a £1 million lifetime limit. Once you have used it, that is it. No second chances. So getting the eligibility rules right matters.

The Two Year Trading Test: The Core Rule

To claim BADR on shares in a personal company, you must meet three conditions throughout the 24 months before disposal:

  • The company must be a trading company (or the holding company of a trading group).
  • You must be an officer or employee of the company.
  • You must hold at least 5% of the ordinary share capital and 5% of the voting rights.

The most common tripwire is the trading company test. HMRC defines a trading company as one that carries on trading activities and whose activities do not include non-trading activities to a substantial extent. "Substantial" here means more than 20% of the company's total activities, measured by turnover, assets, time, or expenses.

Now add a dormant period into that picture. What happens when the company stops trading for six months, twelve months, or longer? Does the clock reset? Does the company stop being a trading company?

When Does A Dormant Period Break The Trading Test?

HMRC's internal manuals (CG53100 onwards) address this directly. A company that is dormant is not trading. If the company is dormant for the entire 24 months before disposal, BADR is not available. The company was not a trading company at any point in the qualifying period.

But what about a company that traded for years, then went dormant for a period, then resumed trading before disposal? Or a company that was dormant at the point of disposal but had traded for most of the previous 24 months?

The answer depends on the pattern of dormancy and the length of the dormant period.

Short Dormant Periods (Under 12 Months)

HMRC accepts that a short dormant period does not automatically disqualify the company from being a trading company. The test is whether the company's activities as a whole, considered over the 24 month period, are predominantly trading activities.

Take a practical example. A Manchester-based software consultancy trades for 18 months, then goes dormant for 4 months while the director looks for a buyer, then sells the shares. The company was trading for 18 of the 24 months. The dormant period is temporary and incidental to the disposal. HMRC will typically accept BADR in this scenario.

The key phrase is "temporary and incidental". If the dormancy is a natural part of winding down the business before sale, it is unlikely to cause problems. If the dormancy reflects the business simply stopping with no intention to resume, that is different.

Long Dormant Periods (12 Months Or More)

Once the dormant period stretches to 12 months or more, HMRC's position hardens. The company is no longer carrying on trading activities. It becomes a non-trading company. Even if it traded for the other 12 months, the overall picture over the 24 month period is not predominantly trading.

There is no fixed rule that 12 months is the cutoff. HMRC looks at the facts. But in practice, a dormant period approaching or exceeding 12 months creates a serious risk that the trading company test fails.

Consider a Birmingham café that closed in March 2024. The director spent 14 months trying to sell the business, then sold the shares in May 2025. The company was dormant for 14 of the 24 months before disposal. HMRC would likely argue the company was not a trading company at the point of disposal. BADR would be denied.

What About Companies That Were Dormant Before Trading Started?

This is a common scenario for newly incorporated companies. A director incorporates a company in January 2024 but does not start trading until June 2024. They sell the shares in January 2026. The company was dormant for the first 5 months of its existence.

The 24 month test runs backwards from the date of disposal. If the company was dormant for 5 months and trading for 19 months, the overall picture is predominantly trading. BADR should be available.

But be careful with the "officer or employee" condition. If you were not an officer or employee during the dormant period, you need to check whether that condition is met for the full 24 months. HMRC's view is that you must be an officer or employee throughout the qualifying period. If you were not appointed as a director until trading started, you may have a gap.

This is where proper incorporation planning matters. Ensure you are appointed as a director from day one, even if the company is dormant.

The "Winding Down" Exception

HMRC recognises a specific exception for companies that have stopped trading and are winding down. If the company ceases to trade and the period between cessation and disposal is no longer than necessary to wind up the company's affairs, the company is still treated as a trading company for BADR purposes.

This exception only applies if the company has genuinely ceased trading. It does not apply if the company simply went dormant with no intention to wind up. And the winding down period must be proportionate. HMRC will challenge a winding down period that drags on for years without good reason.

For a straightforward company with no assets beyond cash and a few debtors, 6 to 12 months is usually acceptable. For a company with complex contracts, property, or litigation, a longer period may be justified.

If you are in this position, document everything. Keep board minutes showing the decision to cease trading and the plan for winding up. Keep correspondence with solicitors, accountants, and creditors. HMRC will ask for this evidence if they challenge the claim.

Practical Planning Steps For Company Owners

If your company has a dormant period or is about to enter one, here is what to do:

1. Check The 24 Month Window Before You Sell

Map out the 24 months before your proposed disposal date. Identify every month the company was dormant. If the dormant months exceed 20% of the total, you have a problem. Consider delaying the disposal until the company has been trading again for long enough to dilute the dormant period.

For example, if the company was dormant for 8 months out of the last 24, wait another 4 months while trading. That brings the dormant proportion down to 8 months out of 28, which is under 20% of the relevant period.

2. Keep The Company Trading Until Disposal

The safest approach is to keep the company trading right up to the point of disposal. If you are planning to sell, do not stop trading early. Continue taking orders, invoicing clients, and paying suppliers. A company that is actively trading on the day of disposal is much easier to defend than one that went dormant six months ago.

3. Appoint Directors From Incorporation

If you are incorporating a new company, appoint yourself as a director on day one. Even if the company is dormant for the first few months, you are still an officer. This satisfies the officer condition for the full 24 months before disposal.

This is one of those small details that makes a big difference. A missed appointment can cost you tens of thousands in CGT.

4. Use Alphabet Shares For Spouse Planning

If you plan to involve your spouse in the company, consider alphabet shares. These allow you to allocate dividends flexibly while keeping the 5% shareholding condition for BADR. Your spouse needs to hold at least 5% of the ordinary share capital and voting rights for 24 months before disposal.

This is a common strategy for husband-and-wife companies, but the timing matters. If you gift shares to your spouse too close to disposal, the 24 month clock may not have run.

5. Document Everything

HMRC will ask for evidence if they challenge a BADR claim. Keep board minutes, management accounts, contracts, invoices, and correspondence that show the company was trading. If there was a dormant period, keep records showing why it happened and what steps were taken to resume trading or wind up.

If you are using the winding down exception, keep a formal board resolution recording the decision to cease trading and the plan for winding up. HMRC's officers are trained to look for these documents.

What Happens If BADR Is Denied?

If HMRC denies BADR, the gain is taxed at the standard CGT rates. For the 2025/26 tax year, that means 18% on gains within the basic rate band and 24% on gains above it. On a £500,000 gain, the difference between BADR at 14% and the higher rate at 24% is £50,000.

You can appeal a denial through HMRC's internal review process or to the First-tier Tribunal. But the best approach is to avoid the problem in the first place. Plan the disposal carefully, and if there is any doubt about the trading company test, get professional advice before you sell.

Our ICAEW qualified team regularly advises company owners on BADR planning. If your company has a dormant period or you are unsure about eligibility, speak to us before you commit to a sale date.

Summary

Business asset disposal relief explained properly means understanding the trading company test in detail. A dormant period does not automatically disqualify you, but it creates risk. Short dormant periods that are temporary and incidental to the disposal are usually fine. Long dormant periods, especially those approaching or exceeding 12 months, are a red flag.

The key is planning. Check the 24 month window before you sell. Keep the company trading until disposal. Appoint directors from day one. Document everything. And if you are unsure, get advice before you act.

BADR saves real money. But only if you qualify. Do not leave it to chance.