Business Asset Disposal Relief (BADR) reduces the CGT on a qualifying business sale to 14% on the first £1m of lifetime gains. The two-year qualifying period and the conditions on shareholding, employment and trading status mean that planning has to start well before the sale process begins. Most disqualifications happen through structural decisions made for unrelated reasons in the 12 to 24 months before exit.
In this article
- What is Business Asset Disposal Relief in 2026?
- What is the two-year qualifying test?
- What does the trading-company condition actually mean?
- What are the most common disqualifiers?
- How does BADR work with multiple shareholders?
- What is the right rhythm for BADR planning?
What is Business Asset Disposal Relief in 2026?
BADR (formerly Entrepreneurs' Relief) gives a reduced CGT rate of 14% on qualifying business disposals, capped at a lifetime allowance of £1m of gains per individual. The relief is intended to reward owner-managers selling a business in which they have had a sustained, active interest. The 14% rate compares with the standard CGT rate of 24% on residential property and other gains, making the relief worth up to £100k per person.
The relief applies to disposals of qualifying shares in a personal trading company, sales of unincorporated businesses, and certain associated disposals. The qualifying conditions vary by route, but the recurring themes are sustained ownership, sustained employment or office, and a genuinely trading enterprise.
What is the two-year qualifying test?
For shares in a personal company, the conditions must be met throughout the two years ending on disposal. The seller must hold at least 5% of ordinary share capital, at least 5% of voting rights, and be entitled to at least 5% of distributable profits and assets on a winding-up. The seller must also be an employee or office-holder of the company throughout that period. The company must be a trading company or the holding company of a trading group.
This is the single most under-appreciated rule. Issuing new shares in the 18 months before sale, restructuring the share classes, or losing employee status temporarily can break the two-year clock. The test is on the day of disposal looking back, with no good-faith defence for accidental disqualification.
What does the trading-company condition actually mean?
HMRC tests whether the company's activities are substantially trading rather than investment. The 20% rule is the working benchmark: if more than 20% of the company's activities, measured by income, assets, expenses or management time, are non-trading, the company fails the test. Cash held for genuine working capital purposes is treated as trading. Cash held as an investment is not. Property let to third parties is investment unless it is part of a trading activity (such as a hotel or care home).
According to HMRC's 2024 BADR enquiry data, the trading-company condition is the most common reason for relief refusal at enquiry stage. Around 28% of refusals turn on excess cash holdings or non-trading property, often built up gradually over the two years before sale. The fix is structural: distribute excess cash, restructure non-trading property out of the holding company, or move the activity into a separate vehicle well before exit.
What are the most common disqualifiers?
Five recurring disqualifiers account for most refusals. Excess investment activity (the 20% threshold). Loss of employee status, common where a founder transitions to a non-executive role 18 months before sale. Share restructuring, issuing new classes or converting existing shares within the two years. Trust ownership, transfers into trust without continued active involvement break the personal-company test. Group restructuring, moving a trading subsidiary out from under the holding company within the two years can disqualify shareholders of the holding company.
Each of these is well-known in isolation. The pattern that costs sellers six-figure tax bills is doing two of them at once for unrelated reasons, for example, transitioning to a non-executive role at the same time as restructuring shares for a new investor, and discovering the BADR consequence only at completion.
How does BADR work with multiple shareholders?
Each shareholder has their own £1m lifetime allowance and tests qualification individually. A spouse who has held qualifying shares for two years and worked in the business has their own relief. Children working in the business who hold qualifying shares are treated similarly. This multiplies the available relief at family level provided the qualifying conditions are genuinely met by each individual.
The temptation in the year before sale is to gift shares to family members to multiply the relief. This generally does not work because the recipient has not held the shares for two years on disposal. Earlier planning, three or four years out, can build genuine multi-shareholder qualification. Late planning rarely does.
What is the right rhythm for BADR planning?
Two checkpoints matter. The first is at sale minus 24 months: confirm that the structure, ownership and employment status will satisfy BADR throughout the next two years, and identify any planned changes (investor rounds, restructures, role changes) that could break the test. The second is at sale minus 6 months: re-test against the actual conditions that have applied over the previous 18 months and address any drift.
The single best discipline is to treat BADR as a two-year project rather than a sale-process question. Sellers who decide their BADR strategy after the first investor enquiry usually accept compromises that earlier planning would have avoided.
Written by Bharat Varsani FCCA. Director of Key Ledgers Global. Tax adviser and CFO with 20+ years of experience advising owner-managers on exit, succession and structural planning across property, care and trading groups.
Sources: HMRC BADR enquiry statistics 2024 publication for the cited 28% trading-condition figure; HMRC CG64000 series for the underlying legislation and worked examples.
Frequently asked questions
Has BADR survived recent budget changes?
Yes, but the rate has moved. As of April 2026, the BADR rate is 14% on the first £1m of lifetime qualifying gains, up from the 10% rate that applied before the 2024 Autumn Budget. The lifetime cap remains £1m per individual.
Can I claim BADR if I am a non-executive director at the time of sale?
Office-holder status (which includes non-executive directors) qualifies for the employment test, provided the office is held throughout the two-year period. The risk is gaps, for instance, stepping down for several months before the sale, which can break the qualifying period.
Does selling to an Employee Ownership Trust qualify for BADR?
EOT sales have their own relief regime that gives 0% CGT on qualifying disposals. BADR is not relevant to a qualifying EOT sale because the EOT relief is more generous. The two reliefs do not stack and a seller chooses the route that fits.