Business Asset Disposal Relief (BADR) gives you a 14% Capital Gains Tax rate on the first £1 million of gains when you sell shares in your company. That is a significant saving compared to the standard 24% rate for non-residential asset gains. But there is a catch. The company must have been a trading company for at least two years before the disposal. And a dormant period can blow that requirement apart.

This article explains how HMRC treats dormant periods when assessing the trading company test for BADR. We will cover what counts as trading, what counts as dormant, and what you can do if your company had a quiet spell before you sold it.

What Is Business Asset Disposal Relief?

BADR replaced Entrepreneurs' Relief from 6 April 2020. The structure is the same: a reduced CGT rate on qualifying gains from the disposal of shares in a personal trading company, or from the disposal of all or part of a sole trader business or partnership.

The key conditions for shares are:

  • You must be an individual (not a company or trust).
  • You must have held at least 5% of the ordinary share capital and 5% of the voting rights for two years before the disposal.
  • You must have been an employee or officer (director) of the company for that same two-year period.
  • The company must have been a trading company (or the holding company of a trading group) throughout that two-year period.

The rate for disposals from 6 April 2025 is 14%. It rises to 18% from 6 April 2026. The £1 million lifetime limit remains. If you have used some of your allowance on previous disposals, you claim the remaining balance.

The Trading Company Test and the Dormant Period Problem

HMRC defines a trading company as one that carries on trading activities on a commercial basis with a view to profit. The company's activities must be wholly or mainly trading. If the company has significant non-trading activities (like holding large cash reserves, investment properties, or passive income streams) it may fail the test.

But what about a company that was trading, then went dormant for six months, then resumed trading and was sold a year later? Does the dormant period break the two-year qualifying period?

The answer is: it depends on the circumstances. And HMRC has a specific approach.

What HMRC Means by "Dormant"

For Companies House purposes, a company is dormant if it has no significant accounting transactions during a period. For BADR purposes, HMRC looks at the substance. If the company had no trading activity, no income, and no expenses beyond statutory filing costs (like confirmation statement fees), it is likely dormant in the relevant sense.

If the company had some minor activity, like receiving bank interest or paying a single invoice for accountancy fees, it may still be considered non-trading for BADR purposes if the activity was not a genuine trade.

The key question is whether the dormant period was temporary and incidental to the company's overall trading lifecycle, or whether it represented a genuine cessation of trade.

When a Dormant Period Does Not Break the Two-Year Test

HMRC's internal manuals (specifically the Capital Gains Manual at CG64050) recognise that a temporary pause in trading does not necessarily mean the company stops being a trading company. The manual says that a company can still be a trading company during a period of temporary cessation, provided the cessation is not permanent and the company intends to resume trading.

This is common in practice. Consider these examples:

  • A contractor Ltd company. The director takes a six-month break between contracts. The company has no income during that period. It pays its annual filing fees and maybe a small electricity bill. The director intends to find a new contract. The company resumes trading after the break. That temporary cessation should not break the trading company test.
  • A seasonal business. A landscape gardening company in the North of England may have no trading activity from November to February. That is a normal seasonal pattern. The company is still a trading company throughout the year.
  • A company restructuring. A company stops trading for three months while it moves premises, updates its product line, or reorganises its operations. The pause is incidental to the ongoing trade.

In each case, the key factors are:

  • The cessation was temporary, not permanent.
  • The company intended to resume trading.
  • The company took steps to resume trading (marketing, seeking contracts, maintaining business assets).
  • The period of inactivity was not excessive relative to the overall trading history.

When a Dormant Period Breaks the Test

The problem arises when the dormant period is not a temporary pause but a genuine cessation. If the company stopped trading and had no realistic prospect of restarting, HMRC will treat the dormant period as a break in the trading company status.

Consider these examples:

  • A company that stopped trading and was later sold. The director retired from active work. The company sat dormant for 18 months with no activity beyond filing. The director then found a buyer for the shares. The company had not traded for 18 months before the sale. That period breaks the two-year trading test.
  • A company that became an investment vehicle. The company stopped trading and began holding cash or investment assets. Even if the company later resumes some activity, the period as a non-trading company breaks the continuity.
  • A company that was struck off and reinstated. If the company was dissolved and later restored to the register, the period between dissolution and restoration is not a trading period. HMRC will treat the company as non-trading during that gap.

In these cases, the company was not a trading company throughout the two-year period before disposal. BADR is not available. The gain is taxed at the standard CGT rates.

The "Temporary Cessation" Test in Practice

There is no fixed time limit for what counts as temporary. HMRC looks at the facts. A six-month dormant period in a ten-year trading history is likely temporary. A two-year dormant period in a three-year trading history is not.

If you are planning to sell your company and it has had a dormant period, you should document the reasons for the inactivity. Keep board minutes showing the intention to resume trading. Keep evidence of steps taken to restart the trade. If you can show the cessation was temporary and incidental, you have a stronger case.

If the dormant period was longer than 12 months, you should take professional advice before assuming BADR is available. The risk of HMRC challenging the claim increases with the length of the gap.

Practical Steps If Your Company Has a Dormant Period

If you are a director planning to sell shares in a company that has been dormant, here is what to do:

1. Check the Two-Year Window

You need the company to be a trading company for the two years ending on the date of disposal. If the dormant period fell within that window, you need to assess whether it was a temporary cessation. If the dormant period ended more than two years before the sale, it is irrelevant. The company resumed trading and has been trading continuously for the two years before disposal.

2. Document the Facts

If the dormant period was temporary, write a note for your records explaining why. Include dates, reasons, and evidence of the intention to resume trading. This is not a formal HMRC requirement, but it helps if HMRC queries the claim later.

3. Consider the Timing of the Disposal

If the company has been dormant for a period that breaks the two-year test, you may need to wait until the company has been trading continuously for two years after resuming before you sell. That is the safest route.

4. Check the Company's Activities During the Dormant Period

Even a small amount of genuine trading activity during the dormant period can help. If the company issued an invoice, paid a supplier, or carried out any work, it may not be truly dormant. HMRC looks at substance over form.

What If the Company Was Never Trading?

If the company was incorporated but never started trading, BADR is not available. The company must have been a trading company at some point. A shelf company that never traded does not qualify. If you incorporated a company and it sat dormant for years before you started trading, the two-year trading period starts from when the company began its trade.

Interaction with Other Reliefs

If BADR is not available because of a dormant period, you may still be able to use other reliefs. For example:

  • Investors' Relief gives a 14% rate on gains from shares issued to external investors (not employees or directors) held for three years. This is less common for owner-managed businesses.
  • Gift Hold-Over Relief can defer the gain if you gift shares to someone (not a company) and both parties elect. The gain is deferred until the recipient sells.
  • Incorporation Relief applies when a sole trader or partnership incorporates their business. It defers the gain on the transfer of business assets into the company.

But none of these replace BADR for a straightforward share sale. If you need the cash from the sale, deferral reliefs do not help.

Our View as ICAEW Qualified Accountants

We see this issue most often with contractor Ltd companies. A contractor takes a long break between contracts, the company goes dormant for 12 to 18 months, and then the contractor decides to sell the company. The dormant period is too long to be a temporary cessation. The contractor loses BADR.

The solution is usually to keep the company trading, even at a low level, during any gaps. Issue an invoice for some work. Keep the company active. A company that files dormant accounts for three years in a row will struggle to claim BADR later.

If your company has had a dormant period and you are considering a sale, speak to us before you commit to the disposal. We can review the facts and advise on whether BADR is available. If it is not, we can help you plan around the issue.

For more on the fundamentals of BADR, see our fundamentals page. If you are considering selling your company, our services include exit planning and CGT advice. You can also read more in our exit and capital gains blog.

Frequently Asked Questions

Can I claim BADR if my company was dormant for six months?

Possibly, if the six-month dormant period was a temporary cessation and the company intended to resume trading. HMRC looks at the facts. A six-month gap in a ten-year trading history is likely acceptable. A six-month gap in a two-year history is riskier. Document the reasons and keep evidence of the intention to resume.

Does filing dormant accounts affect BADR?

Filing dormant accounts at Companies House does not automatically disqualify the company from BADR. But it is a strong indicator that the company was not trading. If you file dormant accounts for a period, you need to show that the company was still a trading company in substance. That is difficult if the accounts show no trading income.

What if the company had some income during the dormant period?

If the company received income that is not trading income (like bank interest or rental income), that does not make it a trading company. The company must be wholly or mainly trading. If the dormant period involved no trading but some investment income, the company is likely non-trading for BADR purposes.

Can I sell my company after a dormant period if I restart trading first?

Yes, but you need to restart trading and then hold the shares for a further two years before disposal. The two-year qualifying period runs from the date the company resumes trading. If the company was dormant for 18 months and then traded for six months before sale, the two-year test is not met. You would need to wait until the company has been trading for two continuous years after the restart.