Business Asset Disposal Relief (BADR): How does it work? And how is relief calculated?

What is it?

Business Asset Disposal Relief (BADR) - formerly known as Entrepreneurs' Relief (ER) - offers a preferential reduced Capital Gains Tax (CGT) rate on disposal of a business or business assets.

This relief is currently available for a cumulative lifetime limit of £1 million business gains per individual.

	Basic rate	Higher rate
Capital Gains Tax (CGT)
From 30 October 2024	18%	24%
Business Asset Disposal Relief (BADR)	Qualifying disposals	Non-qualifying
Before 6 April 2025	10%	CGT rates
From 6 April 2025	14%	CGT rates
From 6 April 2026	18%	CGT rates

What qualifies?

Sale of all or part of a trading business by an individual

This includes sole trade businesses, partnerships, joint ventures, trusts and furnished holiday accommodation businesses - not limited companies.

Goodwill does not qualify if disposed to a close company (broadly meaning controlled by five or fewer participants) but may qualify if disposed to an unconnected company >28 days after incorporation.

Sale of assets used in a sole trade or partnership after cessation

Such assets must have been sold within three years of cessation of the business.

Sale of shares by an individual

The individual must own at least 5% of the Ordinary Share Capital (OSC), voting rights and rights to profits on disposal. They must also be an officer or employee of the company and the company must be trading.

Relief could be denied if the company has substantial non-trading activities ('substantial' is usually considered to be >20% of turnover, assets, or staff resources).

For EMI option shares the ownership period runs from the date the options were granted and there is no need to hold >5%.

Ownership period

The business or assets must have been owned or conditions satisfied for at least two years prior to disposal.

Where a sole trade or partnership business is incorporated for shares the two year ownership period can include both pre- and post- incorporation periods.

BADR should be considered when thinking about closing down or selling your business

Calculating the relief

The tax relief is calculated as follows:

• Any relevant gains and losses are netted off

• Available losses and/or exemptions are deducted (e.g. Annual Exempt Amount)

• Gain taxed at 10% (lifetime limit of £1 million gains)

Claims must be made by the first anniversary of 31 January following no later than 12 months after the tax year of disposal.

For example: a disposal in 2024/25 will need to be claimed by 31 January 2027

Shareholdings which cease to qualify as a personal company

Where an individual's BADR-qualifying shareholding is diluted below 5% so that it ceases to be classed as a 'personal company' the following elections are available:

• A deemed disposal at the date of dilution so that a qualifying gain arises on which BADR can be claimed

• A deferral of the gain until there is an actual disposal of shares - although any further gain would not be eligible for BADR. (this election must be made within four years of the end of the tax year of the deemed disposal)

Associated disposals

An individual who has disposed of assets as part of their withdrawal from a business may qualify for BADR on a subsequent, linked disposal of assets used in the business (an 'associated disposal').

The conditions for an asset to be treated as an associated disposal are:

• The individual is disposing of the whole or part of an interest in a partnership or shares in the company
  

• The disposal is made as part of the individual's withdrawal from the business
  

• The assets being sold have been owned by the individual for at least three years and used for the purpose of the business for two years prior to disposal or cessation of trading
  

Restrictions

Rent restriction

Relief is restricted where rent is received by the individual for use of the asset. Partial relief applies if the asset was let at a reduced rent.

Non-business use restriction

If only part of the asset was used for the business, only the proportion of the gain relating to business use will be eligible for BADR (for example, one floor of a three storey building).

Points to note:

Further specific rules are available for trustees and trusts.

Due to the £1 million limit it can also be worth exploring (Seed) Enterprise Investment Schemes - SEIS and EIS.

An individual disposing of shares in a company of which they are not an employee should consider Investors' Relief.

This document is a simplified helpsheet and careful research should be completed if you are unsure.

Need more information? Contact us today to find out more.

Verifiable Accounts - Professional Financial Accountants providing Tax Preparation and Accounting Services