Business Asset Disposal Relief (BADR): Qualifying Conditions and the 2025/2026 Rate Changes

What Is Business Asset Disposal Relief?

Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs' Relief before it was renamed by Finance Act 2020, is a capital gains tax (CGT) relief that reduces the rate of CGT payable on qualifying disposals of business assets. Before the April 2025 rate changes, BADR reduced the CGT rate to 10% — significantly below the standard 18% (basic rate) and 24% (higher rate) CGT rates applicable to most asset disposals.

BADR is available under sections 169H-169S of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) and applies to qualifying disposals by individuals and some trustees. The relief is subject to a lifetime limit of £1 million of qualifying gains.

The April 2025 Budget confirmed a phased rate increase: from 10% to 14% for disposals on or after 6 April 2025, and then from 14% to 18% for disposals on or after 6 April 2026. The practical consequence is that business owners who completed disposals before April 2025 achieved the most favourable rate treatment, but the relief continues to be meaningful compared to the standard CGT rate.

Qualifying Conditions for BADR

BADR applies to four categories of disposal: disposal of a business or part of a business, disposal of shares in a personal company, disposal of assets used in a business, and disposal by trustees of certain qualifying businesses. The conditions for the most common category — disposal of shares in a personal company — are:

The 5% Shareholding Requirement

The individual must hold at least 5% of the ordinary share capital of the company, and that 5% holding must carry at least 5% of the voting rights. The 5% test applies to ordinary share capital as defined for the purposes of the tests, not necessarily the economic rights.

Anti-dilution rules introduced by Finance Act 2019 allow an individual whose shareholding has fallen below 5% as a result of a new share issue to elect to crystallise a notional BADR disposal at the date of dilution, protecting the relief on gains accrued up to that point. This election, under section 169SB TCGA 1992, must be made within four years of the end of the tax year in which the dilution occurred.

The Officer or Employee Requirement

The individual must be an officer or employee of the company (or of a group company if the shares are in a holding company of a group). A non-executive director who holds 5% of the shares qualifies; a passive shareholder who is not involved in the business does not.

This requirement has generated significant litigation. In McQuillan v HMRC [2017] UKFTT 0344, the First-tier Tribunal considered whether a minimal officer role was sufficient. HMRC's position is that a purely nominal role — appointed solely to satisfy the BADR conditions — will not qualify, and it will consider the substantive nature of the duties performed.

The Two-Year Holding and Trading Period

The company must have been a "trading company" (or the holding company of a trading group) throughout the two years immediately preceding the disposal. A trading company is one whose principal activity is the carrying on of a trade — it must not have more than 20% of its activities attributable to non-trading activities (the investment activity test).

The two-year period is measured from the date of disposal. A company that converted from trading to investment activity nine months before the sale fails the two-year test, even if it traded for twenty years before that.

Condition	Test	Common Failure Point
5% shareholding	Ordinary share capital and voting rights	Dilution from new investor rounds
Officer/employee	Substantive role throughout 2-year period	Non-executive or dormant directorship
Trading company	Two years before disposal	Pre-sale restructuring introduces investment income
2-year holding period	Shares held for at least 2 years	Recently issued growth shares

The £1 Million Lifetime Limit

BADR is subject to a cumulative lifetime limit of £1 million of qualifying gains. This was reduced from the previous £10 million limit by Finance Act 2020 — a reduction widely criticised for undermining the incentive for entrepreneurial risk-taking.

The lifetime limit applies across all qualifying BADR disposals made by the individual throughout their lifetime. A business owner who has previously claimed BADR on a £600,000 gain has only £400,000 of remaining lifetime limit. BADR claims must be made on the self-assessment return for the relevant tax year, within the four-year amendment window.

The April 2025 and April 2026 Rate Changes

The progressive rate increase, announced at the Autumn Budget 2024, fundamentally changes the economics of BADR planning:

Period	BADR Rate	Standard Higher Rate CGT
Before 6 April 2025	10%	24%
6 April 2025 – 5 April 2026	14%	24%
From 6 April 2026	18%	24%

The gap between BADR and standard CGT rates narrows progressively. At 18%, BADR saves only 6 percentage points compared to standard higher-rate CGT — compared to the 14-point saving that existed before the April 2024 changes and the 14-point saving that existed before the October 2024 changes.

For a business owner with £1 million of qualifying gains, the saving from BADR at 18% (versus standard 24%) is £60,000. At 10%, the same saving was £140,000. The relief is still valuable, but the urgency to complete qualifying disposals before future rate increases has diminished compared to the pre-2025 position.

Interaction with Investors' Relief

Investors' Relief (IR), introduced by Finance Act 2016 under sections 169VB-169VC TCGA 1992, provides a 10% CGT rate on qualifying gains from disposal of shares in unlisted trading companies by external investors. Unlike BADR, IR is not affected by the April 2025/2026 rate increases — it remains at 10% for qualifying disposals.

IR requires: the investor to not be an employee or officer of the company; a subscription for newly issued shares (not acquisition from another holder); a three-year holding period; and the company to be a trading company. The lifetime limit for IR is £10 million (separate from the £1 million BADR limit).

For passive investors in early-stage businesses, IR is now significantly more attractive than BADR post the rate increases.

Planning Before Rates Increase Further

Accelerating Disposal Timing

For business owners who were already planning to sell, completing exchange of contracts before 6 April 2026 secures the 14% BADR rate rather than the 18% rate. CGT arises on exchange of contracts, not completion. A business sale where contracts are exchanged in March 2026 but completion occurs in May 2026 benefits from the 14% rate.

Structuring Share Structures

Growth share structures — where management receive a separate class of shares that only participate in gains above a threshold — may be used to create a qualifying BADR shareholding even in a business where the founder retains the majority economic interest. The growth shares must be structured carefully to ensure they qualify as "ordinary share capital" for BADR purposes, as confirmed in Castledine v HMRC [2016] UKFTT 0145.

Maximising the Use of Multiple Individuals' Allowances

Where a business is owned by a couple, structuring shareholdings so that both spouses hold at least 5% and both are officers of the company means that both individuals can use their separate £1 million BADR lifetime limits. On a £2 million gain, both individuals claiming BADR results in a combined tax saving of £120,000 at the 2025/26 rate of 14%, compared with standard CGT.

HPT Group advises owner-managed businesses on disposal structuring, BADR qualification analysis, and timing strategies for transactions expected to complete in the current rate environment. The interaction between BADR, Investors' Relief, and offshore holding company structures is a specialist area that requires careful analysis for each transaction. Contact our corporate tax team to discuss pre-transaction planning, or apply for an initial consultation.