Business Asset Disposal Relief — what it is and whether you qualify

Key takeaways: Business Asset Disposal Relief (formerly Entrepreneurs' Relief) allows qualifying business owners to pay a reduced rate of Capital Gains Tax on sale proceeds. The current rate is 14% for 2025–26, rising to 18% from April 2026. BADR applies to the first £1 million of qualifying gains per individual in a lifetime. Planning ahead — including holding periods, trading company tests, and company structure — determines whether you qualify and how much tax you save.

What is Business Asset Disposal Relief — and what does it actually mean for you?

When you sell a business you have built and owned, the proceeds are not simply yours to keep. The gain — the difference between what the business sells for and what it cost you — is subject to Capital Gains Tax. Business Asset Disposal Relief, known as BADR and formerly called Entrepreneurs' Relief, exists to reduce that tax bill for qualifying business owners.

It is one of the most significant tax reliefs available to UK business owners. It is also one of the most widely misunderstood. Owners either assume they will automatically qualify, or assume they will not qualify at all. Neither instinct is reliable. Whether you benefit from BADR — and by how much — depends on whether you meet a specific set of conditions, and whether you have planned for it properly.

This article explains what BADR is, who qualifies, what the relief is worth, and the steps that could make the difference between paying the standard rate and the reduced one.

The basics: what BADR does

Without any relief, Capital Gains Tax on a business sale is charged at 24% for higher-rate taxpayers (the rate applicable from April 2025 onwards). Business Asset Disposal Relief reduces that to 14% — a rate that is scheduled to rise to 18% from April 2026.

The relief applies to a lifetime allowance of qualifying gains. As of the 2025/26 tax year, that allowance stands at £1 million. This means BADR can only shelter up to £1 million of total qualifying gains across your lifetime — any gains above that threshold are taxed at the standard CGT rate.

If your business sells for, say, £2 million and your qualifying gain is £1.8 million, BADR applies to the first £1 million. The remaining £800,000 is taxed at the standard rate. The relief is still valuable — but it is not unlimited, and for higher-value transactions, it covers only part of the gain.

Who qualifies — the conditions you need to meet

BADR does not apply automatically. You must meet a set of conditions that relate to your relationship with the business and how long you have held your shares. The key tests, as they currently stand, are as follows.

You must be an officer or employee

To qualify, you must be either an employee or an officer (typically a director) of the company throughout the qualifying period. Simply holding shares in a company you no longer work in — as can happen after stepping back from day-to-day involvement — is not sufficient on its own.

You must hold at least 5% of the ordinary share capital

You need to own at least 5% of the company's ordinary shares and be entitled to at least 5% of the distributable profits and assets on a winding-up. This has implications for businesses that have taken on external investors or where share dilution has occurred — it is worth checking your cap table carefully.

The two-year holding period

The shares must have been held, and you must have been an officer or employee, for at least two continuous years before the date of disposal. This is the condition that catches people out most often. If you are planning a sale, the clock is already running — but if you acquired shares recently, or restructured ownership within the past two years, you may not yet qualify.

The company must be a trading company

BADR applies to shares in a trading company — broadly, a company that carries on a trade, rather than one that holds investments or assets passively. There are grey areas here, particularly for companies with significant investment or property holdings alongside their trading activities. HMRC applies a "substantially" test — in practice, if more than 20% of the company's activities are non-trading, the relief may be at risk.

What BADR is not

It is worth being clear about what the relief does not cover. BADR is not a blanket exemption on business sale proceeds. It does not apply to the full sale price — only to the qualifying capital gain. It does not help with income tax if part of your consideration is structured as salary, dividends, or earn-out payments treated as income. And it does not stack with other reliefs in straightforward ways — your tax adviser should model the full picture before you agree deal terms.

The lifetime allowance also means that if you have previously claimed BADR on a different business sale, your remaining allowance may be reduced or exhausted. It is worth checking your historic claims before assuming you have £1 million of relief available.

Planning ahead: the steps that make a difference

The conditions for BADR are not things you can engineer on the day of a sale — they need to be in place throughout the qualifying period. If you are thinking about selling in the next two to three years, the time to review your position is now, not when you are in the middle of a transaction.

Specific steps worth considering with your accountant and tax adviser include reviewing your shareholding structure to confirm you hold the right class and percentage of shares; checking that you meet the officer or employee test in substance, not just on paper; reviewing whether any investments or non-trading assets held by the company could jeopardise the trading company test; and considering whether any recent or planned restructuring — including bringing in new investors — could affect your qualifying period.

For business owners who have restructured into a holding company structure, there are additional rules to navigate. The relief can still apply, but the conditions are slightly different, and the timing of restructuring relative to a planned sale matters.

The interaction with deal structure

How a deal is structured affects whether and how BADR applies. An asset sale and a share sale are treated differently for tax purposes. Earn-out arrangements — where part of the consideration is paid over time and linked to future performance — can create complications around whether proceeds qualify as a capital gain or are treated as income. If the buyer wants to acquire assets rather than shares (which is often their preference), you may need to find a way to make that work tax-efficiently from your side.

These are not reasons to avoid certain deal structures, but they are reasons to get specialist tax advice early — ideally before you accept Heads of Terms, when deal structures are still flexible.

A word on the rates changing

The rate of BADR has changed more than once in recent years, and the current direction of travel suggests it may change again. The rate was cut from 10% to 14% in October 2024 and is scheduled to rise to 18% in April 2026. Owners who are close to being ready to sell and who qualify for BADR may wish to factor this into their timing decisions. Completing a sale before April 2026 at 14% rather than 18% on a £1 million gain is a meaningful difference — though tax timing should never be the only reason to sell.

Getting proper advice

BADR is complex enough that generic guidance has limits. The conditions interact with your specific shareholding structure, your role in the business, the deal structure you end up with, and your personal tax position. A tax adviser with M&A experience — ideally someone who has worked on business sales before — will be able to model your position accurately and identify anything that needs to be addressed before a deal is done.

If you are thinking about selling, we recommend raising BADR with your accountant as early as possible. The conditions are straightforward to meet when you know about them in advance. They are much harder to fix when you are already in a transaction.

How the 2024 Autumn Budget changed BADR

The October 2024 Budget announced significant changes to Business Asset Disposal Relief. The CGT rate under BADR, which had been 10% since 2016, was increased in stages. For disposals from 30 October 2024 to 5 April 2025, the rate increased to 14%. From 6 April 2026 onwards, the rate increases again to 18%.

The £1 million lifetime limit on qualifying gains remained unchanged. However, the standard CGT rates also increased — from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher rate taxpayers on non-residential property and other assets. This means the differential between BADR and standard CGT rates is narrower than it was before the Budget, though BADR still represents a material saving for qualifying sellers.

For a business sale generating a £1 million gain, the difference between paying 18% (BADR) and 24% (standard higher rate CGT) is £60,000 — a significant sum, and one that makes proper planning to qualify for the relief valuable.

Common mistakes that cost sellers BADR eligibility

Many business owners assume they will automatically qualify for BADR. In practice, a number of common situations result in partial or complete disqualification — often discovered only during the tax return process after the sale has completed, when it is too late to fix.

The most frequent issues are: not holding at least 5% of the company's shares and voting rights for the required two-year qualifying period; the company failing the trading company test because it holds significant non-trading assets (investment properties, large cash balances, non-business investments); the seller not being an officer or employee of the company throughout the qualifying period; and share structures where additional classes of shares dilute the qualifying percentage below 5%.

The two-year clock matters. If you are considering bringing investors into the business, restructuring the share capital, or making any changes that affect your percentage holding, take specialist advice first. Changes that seem commercially sensible can inadvertently eliminate BADR eligibility.

BADR planning strategies for business owners

If you are planning an exit in the next two to five years, there are several strategies worth discussing with your tax adviser before you proceed.

Start the clock early. The two-year qualifying period must be satisfied at the point of disposal. If you are not currently an officer or employee, or if the company has recently been incorporated, make sure the clock is running now — not at the point you decide to sell.

Review your share structure. If your holding has been diluted below 5% by share issuances or option schemes, consider whether a reorganisation could restore your qualifying position. Specialist corporate tax advice is needed here, as anti-avoidance rules apply.

Manage non-trading assets. A company that holds investment property, significant cash above trading requirements, or other non-business assets may fail the trading company test. HMRC applies a "wholly or mainly" test, and a company where more than 20% of activities or assets are non-trading may be disqualified. If your company has accumulated significant cash, taking a dividend before sale to reduce the non-trading proportion may be appropriate — though this has its own tax implications.

Consider the timing of a disposal. Where you have a choice over when a disposal falls, the BADR rate differential between tax years — particularly the step from 14% to 18% in April 2026 — may make it worth accelerating or structuring a transaction to fall before that date.