What is Business Asset Disposal Relief (BADR)?

If you are considering selling your business, Business Asset Disposal Relief (BADR) could significantly reduce your Capital Gains Tax (CGT) rate. 

Formerly known as Entrepreneurs' Relief, BADR is one of the most valuable tax reliefs available to business owners, allowing qualifying gains to be taxed at a lower rate than might otherwise apply. However, the relief is subject to a number of conditions and failing to plan ahead can result in a valuable tax-saving opportunity being lost.

How does BADR work? At a glance

• Business Asset Disposal Relief (BADR) reduces the Capital Gains Tax rate on disposals of qualifying assets from 24% to 18%.
• There's a lifetime limit on the amount of capital gains that can benefit from BADR (see below for more information)
• BADR usually applies to the disposal of business assets, such as company shares or part of a trade operated by a sole trader or partnership.
• The individual must have owned the business for at least two years before the disposal.

What is Business Asset Disposal Relief?

Business Asset Disposal Relief reduces the rate of Capital Gains Tax payable on qualifying business disposals from 24% to 18%, subject to a lifetime limit of £1 million of qualifying gains. 

At a glance:
• The relief is available on qualifying disposals of certain business assets, including shares in trading companies and interests in sole trader or partnership businesses. 
• Most qualifying conditions must be satisfied for at least two years before the disposal takes place. 
• Early planning is often essential to ensure relief is not inadvertently lost.

Who might be eligible for BADR?

Business Asset Disposal Relief is available to individuals disposing of qualifying business interests (and may also be available to trustees in certain circumstances).

Potential claimants include:

• Sole traders disposing of all or part of their business.
• Partners disposing of interests in a partnership.
• Shareholders disposing of shares in a qualifying trading company.
• Trustees disposing of qualifying business assets where the relevant conditions are satisfied.

Companies cannot claim BADR.

For shareholders, the rules are a little more complex. In broad terms, the shareholder must generally:

• Hold at least 5% of the ordinary share capital and voting rights of the company.
• Be an employee, director or company secretary.
• Satisfy the relevant qualifying conditions throughout a continuous two-year period ending with the disposal.

Professional advice should therefore be sought well before a disposal is contemplated.

What assets qualify for BADR?

Business Asset Disposal Relief (BADR) only applies to the disposal of certain business assets. These typically fall into one of the following:

• Shares in a company: Shares in a trading company, or holding company of a group of companies.
• Partnership interests: When someone invests in a partnership, they acquire an interest in all the assets used in the partnership. These assets, including goodwill, may be eligible for BADR if they are capital assets.
• Sole trader assets: The capital assets used in carrying on a trade or business as a sole trader, including machinery, vehicles, buildings and property.

There are further conditions around each type of disposal for them to qualify for BADR.

BADR will sometimes also be available on a separate disposal of assets used in one of the above types of business, if there has been a qualifying disposal of the type outlined above.

The £1 million lifetime limit for Business Asset Disposal Relief

The maximum amount of gains that can benefit from BADR during an individual's lifetime is £1 million.

Once this limit has been fully utilised, subsequent gains that would otherwise qualify for BADR will generally be subject to the normal Capital Gains Tax rates instead.

Example

Assume an individual sells shares and realises a qualifying gain of £1 million:

Potential tax saving: £60,000 per eligible shareholder.

What does it mean to “dispose” of an asset?

To dispose of an asset essentially means transfer ownership of the asset to someone else in any way. A disposal does not just mean the sale of the asset.

For example, you might give it away to a family member. You might exchange the asset for another asset, such as a property.

Disposing of an asset often triggers a capital gains tax event, meaning you may need to calculate any profit or loss from the disposal for tax purposes.

Is Business Asset Disposal Relief changing?

July 2024 saw the election of a new Labour government in the UK. While increases to income tax and National Insurance contributions have been ruled out, experts expect the new chancellor will need to raise taxes elsewhere as part of the upcoming October 2024 budget statement.

One area that has not yet been ruled out for potential change is Capital Gains Tax and BADR. In particular, the BADR allowance (lifetime limit) may be reviewed. The lifetime allowance is currently at its lowest level of £1m, the same as when introduced (by the last Labour government) in 2008.

How can you claim Business Asset Disposal Relief (BADR)?

You must claim BADR through your Self-Assessment tax return in the year you dispose of the asset. In the Capital Gains section of your tax return, you must provide details of the disposal, including the proceeds, purchase price, and any associated costs (such as legal fees). This will help you calculate the capital gain. When completing the relevant section, there is an option to claim BADR. You will need to select or indicate that you are claiming the relief on the qualifying gains.

The claim must be made by the first anniversary of 31 January following the tax year in which the disposal occurs.

It is essential that you maintain detailed records of the disposal, including proof of ownership, sale documents, and calculations. HMRC may require these to support your claim.

BADR planning tips

If a business sale may be on the horizon, consider the following:

Start planning early

Many BADR conditions must be met for at least two years before a disposal. Leaving restructuring or shareholding changes until an offer is received can be too late.

Review shareholder positions

Not every shareholder automatically qualifies for BADR. A review of shareholdings, voting rights and employment status should be undertaken well in advance of a transaction.

Consider group structures

Where businesses operate through a group structure, it is important to confirm the group meets the relevant trading requirements.

Review EMI and management incentives

Shares acquired under qualifying Enterprise Management Incentive arrangements can benefit from favourable BADR treatment in certain circumstances. These arrangements should be reviewed before a transaction progresses.

Maintain supporting records

Evidence supporting ownership, employment status and shareholdings should be retained. HMRC may request documentation if a claim is reviewed.

Pitfalls to avoid when applying for BADR

These are the most common reasons we see Business Asset Disposal Relief claims lost:  

1. Assuming every shareholder qualifies
Each shareholder's position must be considered separately. One shareholder may qualify while another does not.

2. Making last-minute changes
Changes to shareholdings shortly before a sale may prevent the two-year qualifying period from being met.

3. Holding significant investment assets
Companies with substantial non-trading activities or investment assets may fail the trading company requirements.

4. Forgetting previous claims
Anyone who has previously claimed Entrepreneurs' Relief or BADR should consider how much of their £1 million lifetime limit remains available.

It's important you consider how any of the actions or assumptions above will impact your BADR claim, even if its months before you consider filing. An accountant will have an awareness of these pitfalls and can proactively flag if or when aspects of your business strategy can impact your BADR or other forms of relief.  

Thinking of selling your business?

For many business owners, BADR can represent one of the most valuable tax reliefs available when planning a business exit. However, eligibility is highly dependent on individual circumstances and business structures, and opportunities can be lost if planning is left too late.

If you are considering a sale, succession plan, management buyout or group reorganisation, obtaining advice well in advance of any transaction can help ensure you are in the best possible position to maximise any available relief. Contact Shorts' Business Taxes team for further support and information.

BADR FAQs

How much tax can BADR save?

BADR reduces the Capital Gains Tax rate on qualifying gains from 24% to 18%, potentially generating significant tax savings of up to £60k per business owner.

How long do I need to own my business/hold my shares before claiming BADR?

In most situations, the relevant conditions must be satisfied for a continuous two-year period before the disposal.  

Can directors and employees qualify?

Yes. Directors and employees can qualify where the relevant ownership and employment conditions are satisfied.

Can trustees claim BADR?

Potentially, yes. Trustees may be able to claim BADR where the necessary conditions are met in relation to a qualifying beneficiary.

Does every business sale qualify?

No. The availability of relief depends on the nature of the business, the assets being sold and the ownership structure. Specific conditions must be met.

Can I claim BADR more than once?

Yes. Multiple claims may be made throughout your lifetime, provided your total qualifying gains benefiting from BADR do not exceed the £1 million lifetime limit.

How do I claim BADR?

BADR is generally claimed through your Self-Assessment tax return. The claim must normally be made by the first anniversary of 31 January following the end of the tax year in which the disposal occurred.