Author:
Jordan Gillies
Head of Business Development and Marketing,
Saltus Asset Management Team
Reviewed by: Megan Jenkins, Chartered Financial Planner, Saltus Asset Management Team
For many entrepreneurs, selling a business can often be the culmination of years of hard work, risk-taking and perseverance. It’s a major milestone, both financially and personally. However, the sale process is rarely straightforward. Understanding the tax implications is just as important as securing the right price. One key consideration is Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, which may allow you to pay a lower rate of Capital Gains Tax (CGT) on qualifying business assets.
What is Business Asset Disposal Relief?
Business Asset Disposal Relief is a tax relief designed to encourage entrepreneurship by reducing the Capital Gains Tax (CGT) payable on qualifying gains when business owners sell or dispose of eligible business assets.
Although some might still remember it as Entrepreneurs’ relief, the name changed in 2020. The purpose remains broadly the same: to reward those who have built and grown businesses by offering a reduced tax rate on qualifying gains.
Current BADR rates and limitations
The value of Business Asset Disposal Relief can depend on both the applicable tax rate and the amount of gains that qualify. BADR is available to individuals and, in some cases, certain trusts. However, it cannot be claimed by companies or by trusts that are entirely discretionary.[1]
BADR is capped at a £1 million lifetime limit on gains. This lifetime limit applies to the total qualifying gains on which an individual has claimed BADR over their entire lifetime. It is not an annual allowance.
For disposals made from 6 April 2026, qualifying gains within the £1 million limit are taxed at 18%, compared with normal CGT rate of up to 24% for higher and additional-rate taxpayers. Any qualifying gains above the £1 million lifetime limit are taxed at normal CGT rates.
If an individual disposed of qualifying assets prior to April 2026, then different CGT rates would apply[2]:
- 14% on all gains on qualifying assets disposed of between 6 April 2025 to 5 April 2026
- 10% on all gains on qualifying assets disposed of on or before 5 April 2025
| BADR | 2027/27 |
|---|---|
| Lifetime limit on qualifying gains | £1 million |
| BADR rate from April 2026 | 18% |
| Normal CGT rate for higher and additional rate taxpayers | 24% |
| Gains above the £1 million BADR lifetime limit | Normal CGT rates apply |
Each individual has a £1 million lifetime limit of qualifying gains that can benefit from BADR. For married couples and civil partners who both hold a qualifying interest in a business, there may be planning opportunities to utilise both individuals’ lifetime allowances, potentially increasing the amount of gains eligible for relief.
BADR conditions and eligibility
Eligibility for Business Asset Disposal Relief depends on several factors, including the type of business, length of ownership and the individual’s relationship to the company. It isn’t as straightforward as you sell your business and you get immediate tax relief.
For shareholders in limited companies, a number of tests may need to be satisfied, including conditions relating to:
- Ownership of ordinary shares
- Voting rights
- Economic entitlement to profits and assets
- Employment or office-holder status
- Holding periods before disposal
If you’re a sole trader or business partner, you generally need to have owned the business for at least two years before selling all or part of it. The same ownership requirement broadly applies if you’re closing the business rather than selling it, although additional conditions may apply.
If you’re selling shares in a limited company, you’ll typically need to have been an employee, director or office holder of the company for at least two years before the sale. The company must also be a trading business or the holding company of a ‘trading group’ rather than one whose main activity is investing.
For many shareholders, eligibility will also depend on meeting the so-called ‘5% tests’ for at least two years before the disposal:
| Requirement | What it means |
|---|---|
| 5% shareholding | You own at least 5% of the company's ordinary share capital |
| 5% voting rights | Your shareholding gives you at least 5% of the voting rights in the company |
| 5% economic interest | You are entitled to at least 5% of distributable profits and assets on a winding up or would reasonably expect to receive at least 5% of the proceeds if the company were sold |
These tests are designed to ensure the relief is targeted at genuine business owners with a meaningful stake in the company, not just passive investors. Business owners with multiple share classes or more complex ownership structures should review their position carefully. Meeting the shareholding test alone does not automatically mean the other conditions are satisfied.
Finally, there are also special rules for certain situations. This includes employee share schemes, company liquidations and businesses where ownership has been diluted over time. As a result, it’s important not to assume you’ll automatically qualify. Reviewing your position well in advance of a sale can help identify any issues and maximise the likelihood of benefiting from the relief.
As is likely evident, it can be a particularly complex area to understand. Because of this, financial advice is recommended.
What types of business disposals may qualify?
Depending on the circumstances, BADR may apply to:
- The sale of all or part of a sole trader business
- The disposal of qualifying business assets within three years after the business ceases
- The sale of shares in a qualifying trading company
- The sale of an interest in a partnership
- Certain business asset disposals connected with retirement or succession planning
Not every disposal qualifies. It’s important to assess eligibility before any transaction is completed.
Advanced transaction scenarios: Liquidation, deferred consideration, and anti-avoidance
Business sales are (unfortunately) not always straightforward. Certain transactions require additional consideration when assessing BADR eligibility.
Company liquidations
Where a business owner chooses to wind up and liquidate a company rather than sell it, BADR may still be available in some circumstances. However, eligibility depends on the facts of the case and the structure of the liquidation.
Deferred consideration
Many business sales involve deferred payments, earn-outs or contingent consideration. These arrangements can affect the timing of gains and the availability of relief. Understanding the tax treatment before agreeing terms can help avoid unexpected outcomes.
Anti-avoidance rules
HMRC has introduced anti-avoidance provisions designed to prevent individuals from obtaining tax advantages through arrangements that do not reflect genuine commercial activity. This includes individuals trying to lock in earlier, more favourable BADR rates through arrangements such as unconditional contracts or certain share reorganisations ahead of rate changes.
Business owners considering complex transactions should seek specialist advice to ensure compliance and avoid jeopardising relief.
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BADR considerations when selling a business
When planning a sale, consider the following checklist:
- Review whether BADR conditions are currently satisfied
- Assess whether ownership structures need adjustment
- Confirm qualifying periods have been met
- Understand the impact of earn-outs or deferred payments
- Review shareholder arrangements
- Coordinate tax planning with legal and corporate advisers
- Consider wider financial planning objectives after completion
Preparation often needs to begin well before a sale process formally starts.
How BADR affects Capital Gains Tax
As discussed, without available reliefs, gains from a business sale may be subject to standard Capital Gains Tax treatment. Where BADR applies, qualifying gains may benefit from a more favourable tax rate, particularly for higher or additional-rate taxpayers. This could potentially improve the net proceeds retained by the seller.
As tax treatment depends on individual circumstances, calculations should always be reviewed in the context of broader financial planning.
When to start planning for BADR
One of the more common mistakes some business owners might make is waiting until a sale is imminent before reviewing eligibility. This is rarely an effective strategy. Just like if you were running a marathon, diligent preparation is key to a successful (and hopefully pleasant) finish.
Because certain conditions must often be satisfied for a qualifying period before disposal, early planning is important. Ideally, business owners should review their position several years before an anticipated exit. This can provide time to:
- Address potential qualification issues
- Review ownership structures
- Consider succession plans
- Align tax planning with commercial objectives
- Maximise after-tax proceeds from a future disposal
The earlier planning begins, the more options are typically available. Seeking financial advice early will be key to achieving tax-efficiency.
Financial planning after claiming BADR
Selling your business is only one stage of the journey. Following a business exit, owners often need to consider:
- Long term investment strategy
- Retirement planning
- Pension funding
- Estate and inheritance tax planning
- Family wealth transfer objectives
- Liquidity and cashflow requirements
A coordinated financial plan can help ensure that wealth created through a business sale continues to support future personal, family and charitable goals.
Article sources
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All authors have considerable industry expertise and specific knowledge on any given topic. All pieces are reviewed by an additional qualified financial specialist to ensure objectivity and accuracy to the best of our ability. All reviewer’s qualifications are from leading industry bodies. Where possible we use primary sources to support our work. These can include white papers, government sources and data, original reports and interviews or articles from other industry experts. We also reference research from other reputable financial planning and investment management firms where appropriate.