If you own a business in the UK and plan to sell it one day, the single most valuable tax relief you need to understand is Business Asset Disposal Relief. Formerly known as Entrepreneurs' Relief, BADR reduces the Capital Gains Tax (CGT) you pay on the sale of your business from the standard 18% or 24% down to just 14% for the 2025/26 tax year. That difference can save you tens of thousands of pounds. Possibly hundreds of thousands.
This guide is for directors of limited companies, sole traders, and partnership owners who want to understand exactly how BADR works, who qualifies, and what traps cause claims to fail. We are ICAEW-qualified accountants who have advised business owners across the UK, from Shoreditch tech startups to Manchester manufacturing firms and Bristol creative agencies, on structuring their exits to secure this relief. We will walk you through the rules, the numbers, and the planning steps you need to take now, not the week before you exchange contracts.
What is Business Asset Disposal Relief?
Business Asset Disposal Relief is a form of CGT relief that applies when you dispose of qualifying business assets. It was introduced in 2008 as Entrepreneurs' Relief and rebranded in the 2020 Budget. The core principle is simple: if you have built a business over a sustained period, the first £1 million of gains you realise on disposal are taxed at a lower rate than standard CGT.
Current and future rates
The rate of BADR has changed several times. For the 2025/26 tax year, the rate is 14%. From 6 April 2026, the rate rises to 18%. This is a material change. If you are planning an exit in the next 18 months, the timing of your disposal could make a significant difference to your net proceeds.
| Tax year | BADR rate | Standard CGT (basic rate) | Standard CGT (higher rate) |
|---|---|---|---|
| 2024/25 | 10% | 10% | 20% |
| 2025/26 | 14% | 18% | 24% |
| 2026/27 onwards | 18% | 18% | 24% |
The gap between the BADR rate and the standard higher rate narrows over time. This makes planning more important, not less. If you miss the conditions for BADR, you could pay 24% on gains that would have been taxed at 14%.
The £1 million lifetime limit
The relief applies to the first £1 million of qualifying gains you realise in your lifetime. This is a cumulative limit. If you used £300,000 of BADR on a previous disposal, you have £700,000 remaining for future disposals. The limit applies per individual, not per company. A husband and wife who both own shares can each claim £1 million of relief, giving a combined £2 million.
There is no restriction on how many disposals you can make. You simply keep a running total of the gains on which you have claimed BADR. Once you hit £1 million, further gains are taxed at standard CGT rates.
Who qualifies for Business Asset Disposal Relief?
Eligibility depends on the type of asset you are disposing of and your relationship to the business. The rules differ for company shareholders, sole traders, and partnership members.
Shareholders in a limited company
To qualify for BADR on the sale of shares in your personal trading company, you must meet all of the following conditions throughout the 24 months ending with the date of disposal:
- You are an officer or employee of the company (director or employee, including a part-time role)
- The company is a trading company or the holding company of a trading group
- You hold at least 5% of the ordinary share capital
- That 5% holding gives you at least 5% of the voting rights
- You are beneficially entitled to at least 5% of the profits available for distribution
- You are beneficially entitled to at least 5% of the assets on a winding up
The 5% test is strict. If you hold 4.9% of the shares, you do not qualify. If your shareholding drops below 5% during the 24-month period, for example, because of a dilution in a funding round, you lose the qualifying period and must start again.
Sole traders and partnership members
If you are a sole trader or a member of a partnership, you qualify for BADR on the disposal of the whole or part of your business. The conditions are:
- You have owned the business for at least 24 months before the disposal
- The business is a trading business (not an investment business)
- You dispose of the whole business or a significant part of it
For sole traders, the relief applies to goodwill, premises, plant and machinery, and other business assets. For partnership members, it applies to your share of the partnership assets.
Assets you have lent to your company
If you have loaned assets to your company, for example, a building or intellectual property, and you dispose of those assets, you may qualify for BADR. The conditions are similar: the asset must have been used in the company's trade for at least 24 months, and you must have disposed of it within three years of ceasing to use it in the trade.
What counts as a trading company?
HMRC defines a trading company as one that exists wholly or mainly for the purpose of carrying on a trade. The definition excludes companies whose main activity is investment, property letting, or holding assets for capital appreciation.
This is one of the most common areas where BADR claims fail. A company that starts as a trading business but accumulates significant cash or investment assets over time can lose its trading status. HMRC applies the "trading activities" test rigorously.
If your company has substantial non-trading assets, for example, a large cash reserve held for more than 12 months, or a portfolio of investment properties, you should review whether it still qualifies as a trading company. HMRC's guidance states that a company is not a trading company if its activities are "substantially non-trading". The threshold is generally considered to be around 20% of total activities, but this is not a statutory rule and each case turns on its facts.
How Business Asset Disposal Relief works in practice
Let us look at a worked example to see how the numbers play out.
Worked example: Sarah's digital agency
Sarah owns 100% of a digital marketing agency based in the Northern Quarter in Manchester. She has been a director and employee for six years. She sells her shares in May 2025 for £1.8 million. Her base cost (the amount she originally paid for the shares) is £100,000. Her gain is £1.7 million.
Sarah has never claimed BADR before, so her full £1 million lifetime limit is available.
| Item | Amount |
|---|---|
| Sale proceeds | £1,800,000 |
| Less: base cost | (£100,000) |
| Chargeable gain | £1,700,000 |
| BADR: first £1,000,000 at 14% | £140,000 |
| Remaining gain: £700,000 at 24% | £168,000 |
| Total CGT due | £308,000 |
| Effective tax rate | 18.1% |
Without BADR, Sarah would pay 24% on the full £1.7 million gain: £408,000. The relief saves her £100,000. If she had sold in the 2024/25 tax year when the BADR rate was 10%, her tax would have been £268,000, a saving of £140,000 compared to the standard rate.
This illustrates why timing matters. If Sarah can delay her sale until after 5 April 2025, she benefits from the current 14% rate. If she delays beyond 5 April 2026, the rate rises to 18%, and her tax on the first £1 million becomes £180,000 instead of £140,000.
Common traps that cause BADR claims to fail
We see the same mistakes repeatedly. Here are the most common reasons HMRC rejects BADR claims.
Failing the 5% shareholding test
If you hold shares through a nominee or a trust, HMRC looks through to the beneficial owner. If your spouse holds shares but you do not, you cannot aggregate their holding with yours to reach the 5% threshold. Each individual must meet the 5% test independently.
Share dilution is another risk. If your company issues new shares to investors and your percentage holding drops below 5%, you lose your qualifying period. You would need to rebuild 24 months of qualifying ownership from the date your holding falls below 5%.
Not being an officer or employee
You must be a director or employee of the company throughout the 24-month qualifying period. If you resign as a director and remain only as a shareholder, you stop qualifying. If you are a non-executive director, that usually counts as an officer, but check your service agreement.
If you sell your shares after ceasing to be a director, you have a window. You can still claim BADR if you dispose of the shares within three years of ceasing to be an officer or employee, provided you met the conditions up to that point.
The company is not trading
This is the most subjective test and the one HMRC challenges most often. If your company holds significant investment assets, commercial property let to a third party, a large portfolio of listed shares, or cash balances that are not needed for working capital, HMRC may argue it is not a trading company.
We advise clients to keep clear records of how cash reserves relate to trading needs. If you have £500,000 in the bank and your annual turnover is £600,000, HMRC will ask why you need that much cash. Document your working capital requirements and your plans for the funds.
Associated companies and the limits
If you own shares in multiple companies, HMRC treats them as associated companies for certain purposes. The £1 million lifetime limit is per individual, not per company, so owning shares in two companies does not give you two limits. However, the associated company rules can affect whether each company qualifies as a trading company in its own right.
Business Asset Disposal Relief and incorporation
If you are a sole trader or partnership member considering incorporating your business, BADR can apply to the transfer of your business to a limited company. This is called an incorporation disposal.
When you transfer your business as a going concern to a company in exchange for shares, you are making a disposal for CGT purposes. You can claim BADR on the gain, provided you have owned the business for at least 24 months. The gain is calculated as the market value of the shares you receive, less the base cost of your business assets.
This is a common planning point. If you incorporate and take shares, you can use your BADR allowance at that point. The shares you receive then have a new base cost equal to their market value. When you later sell those shares, you pay CGT on the gain from that new base cost, and you can claim BADR again if you still have remaining allowance.
Read more about incorporation and the tax implications of moving from sole trader to limited company.
Business Asset Disposal Relief and EIS shares
If you hold shares in a company that qualified for Enterprise Investment Scheme (EIS) relief, the interaction with BADR can be complex. EIS shares are generally exempt from CGT if held for at least three years and you claim the relief. If you dispose of EIS shares before the three-year holding period, the EIS relief is withdrawn and you pay CGT on the gain.
You can claim BADR on EIS shares provided you meet the normal conditions, 5% holding, officer or employee, trading company, and the shares have been held for at least 24 months. The EIS deferral relief does not prevent you from claiming BADR, but the calculations need careful handling.
Planning your exit to maximise Business Asset Disposal Relief
If you are thinking about selling your business in the next few years, start planning now. BADR is not something you can fix the week before completion.
Check your shareholding
Do you hold at least 5% of the ordinary share capital? Do you have 5% of the voting rights? If you hold different classes of shares, check that your rights to profits and assets on winding up also meet the 5% threshold. If you are close to the boundary, consider restructuring your share capital before the 24-month qualifying period starts.
Review your employment status
Are you a director? Is that recorded at Companies House and in your board minutes? If you are a shadow director, HMRC may challenge whether you meet the officer test. Ensure your appointment is formal and documented.
Keep the company trading
Avoid accumulating non-trading assets in the company. If you have surplus cash, consider paying dividends or investing in pension contributions rather than leaving it in the company bank account. If you need to hold cash for a specific purpose, document the business case.
Consider the timing of your disposal
The BADR rate rises to 18% from 6 April 2026. If you can complete your disposal before that date, you pay 14% on the first £1 million. If you cannot, the rate increases by 4 percentage points. For a £1 million gain, that is an extra £40,000 in tax.
If you are selling a property that qualifies for BADR, for example, a building used in your trade, remember that residential property gains are reported and paid within 60 days of completion. The 60-day reporting requirement applies even if you claim BADR. You must file a CGT property return on HMRC's online system within 60 days.
Business Asset Disposal Relief vs other reliefs
BADR is not the only relief available on business disposals. Depending on your circumstances, other reliefs may be more valuable.
Gift Hold-Over Relief
If you gift business assets to someone else, you can claim Gift Hold-Over Relief to defer the gain until the recipient disposes of the asset. This is useful if you want to pass your business to family members without triggering an immediate tax charge. The recipient inherits your base cost and pays CGT when they sell.
Gift Hold-Over Relief and BADR are mutually exclusive on the same disposal. If you claim hold-over relief, you cannot also claim BADR. You need to decide which is more beneficial based on your circumstances.
Investors' Relief
Investors' Relief is similar to BADR but designed for external investors who hold shares in unlisted trading companies. The rate is the same as BADR, and the lifetime limit is also £1 million. The conditions differ: you do not need to be an officer or employee, but you must have held the shares for at least three years, and they must have been subscribed for in cash.
Rollover Relief
If you sell business assets and reinvest the proceeds in new business assets, you can claim Rollover Relief to defer the gain. This is common when a sole trader sells one premises and buys another. Rollover Relief defers the gain rather than reducing the rate. You can combine it with BADR in some circumstances, but the interaction is complex.
Action checklist: Securing Business Asset Disposal Relief
Use this checklist to prepare for a BADR claim. Work through it at least 12 months before you plan to sell.
- Confirm your shareholding. Do you hold at least 5% of the ordinary share capital and voting rights? Check the company's articles of association and share register.
- Confirm your employment. Are you a director or employee? Is your appointment documented? Are you on the payroll?
- Check the 24-month period. Have you met all conditions for the full 24 months before the disposal? If not, delay the sale until you have.
- Review the company's trading status. Are there significant non-trading assets? If so, consider extracting them or restructuring before the qualifying period starts.
- Calculate your remaining allowance. Have you used any BADR before? Check your previous tax returns. The £1 million limit is cumulative.
- Consider spousal planning. If your spouse holds shares, can they also qualify? Each spouse has their own £1 million limit.
- Document everything. Keep board minutes, employment contracts, share certificates, and any correspondence about the company's trading activities.
- Get professional advice. BADR claims are complex and HMRC reviews them closely. An error in the claim can cost you the relief entirely.
If you are planning an exit, we recommend speaking to a qualified accountant at least 18 months before your intended disposal date. The rules around trading status, associated companies, and share structures are detailed, and the cost of getting them wrong is measured in tens of thousands of pounds. Contact our team to discuss your exit strategy.
Frequently asked questions about Business Asset Disposal Relief
Can I claim BADR if I sell part of my business?
Yes, if you are a sole trader or partnership member and you dispose of part of your business, you can claim BADR on that part. The same conditions apply: you must have owned the business for at least 24 months, and the part you dispose of must be a distinct and identifiable part of the trade. For company shareholders, selling part of your shareholding qualifies for BADR provided you meet the 5% and officer/employee conditions on each disposal.
What happens if I have already used some of my £1 million limit?
You deduct the gains on which you have previously claimed BADR from the £1 million limit. For example, if you claimed BADR on a gain of £250,000 in 2019, your remaining allowance is £750,000. You can use that on future disposals until it is exhausted. Keep a record of all previous BADR claims, including the gain and the tax year, as HMRC may ask for this when you make a new claim.
Does BADR apply to goodwill?
Yes, goodwill is a chargeable business asset for CGT purposes. If you are a sole trader or partnership member selling your business, the goodwill element of the sale qualifies for BADR provided you meet the 24-month ownership condition. For company shareholders, goodwill is not directly relevant, you are selling shares, not assets. However, if you sell assets to your own company, the goodwill element of that disposal may qualify for BADR.
Can I claim BADR on a property I rent to my company?
Possibly. If you own a commercial property and rent it to your trading company, the property is an asset used in the company's trade. If you dispose of the property, you can claim BADR provided you have owned it for at least 24 months and the property has been used in the company's trade throughout that period. The company must be a trading company. Residential property does not qualify for BADR in most circumstances.
What is the difference between BADR and Entrepreneurs' Relief?
There is no difference. Business Asset Disposal Relief is simply the new name for Entrepreneurs' Relief. The name changed in the 2020 Budget, but the rules are substantially the same. If you see references to Entrepreneurs' Relief in older documents or HMRC guidance, they refer to the same relief. The £1 million lifetime limit and the qualifying conditions are identical.
Do I need to report BADR on my tax return?
Yes. You claim BADR on your Self Assessment tax return for the year in which the disposal occurs. For company shareholders selling shares, you report the gain and claim the relief on the Capital Gains Tax pages of your return. For sole traders and partnerships, you report the disposal on the business pages and claim the relief on the CGT pages. If you sell a residential property, you must also file a 60-day CGT property return and pay the tax within 60 days of completion.
For more detailed guidance on exit planning and tax reliefs, explore our exit and capital gains resources or read about the fundamentals of UK business tax.