Business Asset Disposal Relief (Entrepreneurs’ Relief) Explained

“Selling your business can be one of the most rewarding moments in your career — but also one of the most taxing, literally.”

For many business owners and contractors, the prospect of disposing of a business triggers a whirlwind of excitement and anxiety. After all, you’ve poured your time, energy, and money into building something meaningful. And yet, the tax man is always ready at the finish line. That’s where Business Asset Disposal Relief (BADR) — formerly known as Entrepreneurs’ Relief — can make a huge difference. In simple terms, it’s a way to significantly reduce the capital gains tax you pay when you sell a qualifying business.

In this article, I’ll break BADR down in plain English, share practical examples, and guide you through how to maximise its benefits. By the end, you’ll have a clear roadmap, whether you’re thinking about selling a small business, your shares in a company, or planning long-term tax strategy.

Eligibility

Before we dive into the numbers, let’s get one thing straight: BADR is not automatic. You need to meet specific criteria. Let’s explore who can claim it, what qualifies, and how long you need to be involved in the business to take advantage.

Who Can Claim Business Asset Disposal Relief?

You might think it’s simple — if you run the business, you qualify. But BADR is more precise. To claim it, you must be either an employee or an office holder of the company. That means directors, secretaries, or similar positions count.

Here’s a story: I once worked with a contractor, Tom, who had built a small consultancy over ten years. He wasn’t a director for the first five years but eventually became one. Only the period after he became a director counted toward BADR. Timing matters.

Which Types of Business Assets Qualify for BADR?

BADR isn’t for selling a car or office furniture. It applies to:

• Shares in a trading company.

• A business or part of a business.

• Certain assets used in a business.

It’s crucial that the business is trading, not merely holding investments. We’ll cover that in more detail later.

Do I Need to Be a Director or Shareholder to Qualify?

Yes — but there’s nuance. You need to hold at least 5% of both the share capital and voting rights in the company for at least two years up to the point of sale. If you’ve worked hard but only have a minority stake, you might not qualify.

I remember a client, Sarah, who owned 4.9% of her company. She thought she’d qualify. Unfortunately, HMRC turned her down because the 5% threshold wasn’t met. That small decimal point made a huge difference!

Can Trustees or Family Members Claim BADR?

BADR can extend to certain trustees, particularly if the shares are held in trust for your benefit. Family members can also benefit if the shares are legally transferred — but be careful. Each person must meet the qualifying conditions themselves. A simple transfer between spouses can work, but you must plan it carefully.

What Counts as a “Trading Company” for BADR Purposes?

Trading means actively running a business, not just investing money. HMRC defines trading companies as ones whose main activities generate income from selling goods or services, rather than holding investments.

For example, a small property company that primarily rents out properties might not qualify if its rental income dominates. But if it operates a construction or consultancy business, it likely does.

How Long Do I Need to Hold My Shares to Qualify?

The standard qualifying period is two years, counting backwards from the disposal date. That includes any shares obtained through an Enterprise Management Incentive (EMI) scheme.

A client, James, once held options under an EMI plan. We calculated his two-year qualifying period, including the time he held the options, which ultimately allowed him to claim BADR on his full gain. Planning ahead really pays off!

Shares and Ownership

How you hold shares can make or break your BADR claim. It’s not just the number of shares — it’s the value, rights, and type of shares that matter.

Do EMI, Preference, or Alphabet Shares Qualify?

EMI shares almost always qualify. There’s no “personal company” test for these shares. Preference or alphabet shares can qualify if they provide at least 5% entitlement to sale proceeds, profits, or assets on a winding up.

For example, one client held multiple classes of shares. By reviewing the rights attached to each, we were able to confirm that his preference shares qualified for BADR. It was a small detail that made a massive difference to his tax bill.

Does the Number of Shares I Hold Matter, or Is It the Value?

It’s the value that counts, not the number. Holding 10,000 shares out of 1 million isn’t enough unless the nominal capital you hold equals at least 5% of total issued capital.

Can Indirect Shareholdings Through Another Company Qualify?

Yes, sometimes. If your personal company holds at least 5% of a trading JV or partnership, you may qualify for BADR on the disposal of your company shares. However, this is complex and usually needs professional planning.

What Happens If My Shareholding Gets Diluted Below 5%?

Dilution doesn’t necessarily destroy your relief. The gain earned before dilution is taxed at 10%, and the gain after dilution is taxed at the normal CGT rate. You can even elect to defer BADR CGT arising on dilution until you actually sell your shares.

Can I Transfer Shares to My Spouse and Still Claim BADR?

Yes. Transfers between spouses can be effective for maximising the lifetime £1m limit. However, only one spouse can benefit on a given shareholding. Planning ahead is crucial to make the most of the relief.

Tax and Gains

BADR can save you significant money — but you need to understand how it works.

What Is the Lifetime Limit for BADR?

The lifetime limit is £1 million per individual. That’s not per company or per year — per person across their lifetime. If you have multiple businesses or shareholdings, careful planning can help you stay within the limit while maximising savings.

How Is the 10% CGT Rate Applied?

If your gain qualifies, you pay 10% on the part that falls within the lifetime limit. Any gain exceeding £1 million is taxed at standard CGT rates, currently 20% for most gains.

Can I Claim BADR on Part of My Gain If I Only Partly Qualify?

Yes. The relief can be prorated based on the qualifying portion of your shares or assets. This is why accurate records and valuations are essential.

How Do I Claim BADR, and What Is the Deadline?

You claim BADR via your self-assessment tax return. The deadline is 12 months after the filing deadline for the tax year of disposal. For example, shares sold in 2022–23 must have a claim submitted by 31 January 2025.

What Happens If I Sell a Company That’s No Longer Trading?

You may still qualify if the sale occurs within three years of the company ceasing to trade. Timing is everything, so don’t wait too long to act.

Planning and Strategy

Planning ahead can transform your tax bill. Small adjustments today can save huge sums tomorrow.

How Can I Structure My Company to Maximise BADR?

Ownership structure is key. Consider issuing shares in a way that ensures each shareholder can meet the 5% threshold. Think about the long-term implications of share classes, voting rights, and profit entitlements.

Can Splitting Ownership Among Family Members Increase My Relief?

Yes! For example, if you and your spouse each hold shares, both of you can claim up to £1 million each. This strategy can be extremely powerful if the business is expected to generate high-value gains.

How Do Associated Assets (Like Property) Affect BADR?

If your company uses an asset you personally own — say, a building or equipment — you must align ownership and use for at least three years before selling. Otherwise, BADR on that asset may be restricted.

Can I Make Changes to My Shares Without Losing BADR?

Changing share rights can restart the two-year qualifying period. But if done carefully, for example by amending the articles, you can maintain eligibility. Always plan such changes in advance.

Risks and Anti-Avoidance

BADR is generous — but HMRC is watchful.

What Is the “Anti-Phoenix” Rule?

This prevents you from selling a business, claiming BADR, and then setting up a very similar business within two years. HMRC can treat the gain as income instead of capital gains, which could be taxed at much higher rates.

Could HMRC Challenge My BADR Claim?

Yes. If your company isn’t truly trading, or if your role and ownership are ambiguous, HMRC may challenge the claim. Accurate records and documentation are critical.

What Activities Might Count as Non-Trading and Affect Relief?

Excessive investment activity, holding large cash reserves, or making loans may be considered non-trading. The exact treatment is complex and depends on your company’s circumstances.

How Can I Get Clearance from HMRC to Be Sure My Claim Is Valid?

You can request non-statutory clearance. This confirms how HMRC views your situation before disposal. It’s a small upfront step that can save thousands in tax and stress.

Final Thoughts

Business Asset Disposal Relief is more than a tax saving — it’s a tool for strategic planning. But it requires careful attention to detail, timing, and structure. Whether you’re a contractor, a small business owner, or planning to exit your business, understanding BADR can make a real difference to your post-sale finances.

I’ve seen clients save hundreds of thousands simply by planning their shareholding, aligning assets, and claiming correctly. It’s not just theory — it’s real money.

Take the time now to review your structure, your shares, and your trading activities. With careful planning, you can walk away from your business sale with far more than just memories — you can walk away with confidence, financial security, and yes, a significant tax saving.