Business Asset Disposal Relief: UK BADR 14% Rate Explained (2025/26)

What BADR is — and a short history

Business Asset Disposal Relief is a Capital Gains Tax relief that applies a reduced rate to the disposal of qualifying business assets. It exists because the government has long judged that entrepreneurs who build and sell businesses should not be taxed at the same rate as someone selling a second home or a portfolio of listed shares.

The relief was introduced in April 2008 as Entrepreneurs' Relief, replacing the older Business Asset Taper Relief. Under ER, qualifying gains were taxed at a flat 10% — a striking saving against the then-headline CGT rate of 18% or 28%. The £1 million lifetime limit at launch grew quickly to £2m, £5m and ultimately £10m by 2011. ER became one of the most generous reliefs in the UK tax code, costing HMRC roughly £2.5 billion a year by the late 2010s.

In March 2020 the relief was rebranded Business Asset Disposal Relief and the lifetime limit was cut from £10m to £1m, restoring its original 2008 scale. The 10% rate survived until the Autumn 2024 Budget, which announced a two-step rise: 14% from 6 April 2025and 18% from 6 April 2026. The £1 million lifetime cap is unchanged.

The 14% / 18% vs 24% gap

BADR's value is the gap between the BADR rate and the standard higher CGT rate that would otherwise apply. The standard higher CGT rate is 24% on most assets in 2025/26 (raised from 20% by the Autumn 2024 Budget for disposals on or after 30 October 2024). Residential property has its own 24% higher rate. So the BADR saving moves as follows:

Headline: BADR is still worth claiming, but the relief is now half what it was at its peak. From April 2026 the maximum lifetime saving falls to £60,000 — meaningful, but no longer transformative.

The £1 million lifetime limit

BADR has a strict lifetime capof £1 million of qualifying gains. This is cumulative across every claim you make over your entire lifetime, and it counts prior Entrepreneurs' Relief claims too. Once you have used £1 million of relief, no further BADR is available — any later qualifying gain is taxed at the full standard rate of 24%.

The limit is per person, not per business. Spouses each have their own £1m allowance, so a couple owning a business 50:50 effectively shares a £2m BADR pool — provided each individually meets the 5% test and 2-year period. Trustees claim against the qualifying beneficiary's personal lifetime limit, not a separate trust limit.

Bear in mind the history: the limit was £10m from 2011 to March 2020. People who exited a substantial business under ER pre-March 2020 are very likely to have used more than £1m of their lifetime allowance already — meaning they have no BADR left for any subsequent disposal. HMRC tracks lifetime usage; claim records can be requested from HMRC if you are unsure how much you have used.

Qualifying assets

BADR applies to four broad categories of disposal:

• Sole-trader or partnership business: disposal of the whole or a distinct part of a business carried on by the individual (or partnership) — including associated assets used in the business and disposed of within three years of cessation.
• Shares in a personal trading company:disposal of shares (or securities) in the individual's personal company, where the company is a trading company or the holding company of a trading group, and the 5% test plus 2-year qualifying period are met.
• EMI option shares: shares acquired by exercising a qualifying Enterprise Management Incentive option. The 5% test does not apply, but the 2-year period (from option grant) does.
• Trust assets: disposal of trust business assets where a qualifying beneficiary meets the personal conditions and joins in the BADR claim.

Notably not qualifying: investment property, buy-to-let portfolios (no trade), passive holdings of listed shares, and most lettings businesses. Furnished holiday lettings lost their special BADR-friendly trading-like status when the FHL regime was abolished from 6 April 2025.

The 5% test — strict on all four limbs

For a share disposal, the company must be the seller's "personal company". That requires the seller, for at least two years before disposal, to hold simultaneously:

• At least 5% of the ordinary share capital by nominal value;
• At least 5% of the voting rights exercisable in general meeting;
• At least 5% of profits available for distribution to equity holders or at least 5% of the proceeds in the event of a sale of the whole ordinary share capital (an alternative economic test added in 2018);
• At least 5% of assets available on a winding up.

All four limbs must be met at the same time, throughout the 2-year period. Bespoke alphabet sharearrangements (separate share classes for each director, distributions voted class by class) commonly fail the "5% of profits available for distribution" test — because each class only has access to its own dividend pool, not 5% of total distributable reserves. Several tribunal cases (Stephen Warshaw v HMRC, etc.) have turned on this point.

The seller must also be an officer or employee of the company (or another group company) throughout the same 2-year period. Non-executive directors and salaried employees both qualify. A consultant on a personal services contract typically does not.

The 2-year qualifying period

The qualifying period of two years was extended from one year in April 2019, in an anti-abuse measure aimed at stopping recently-appointed directors qualifying after a brief stint. The clock runs to the date of disposal, or to the date the trade ceases — whichever is earlier.

If you cease trading or wind up the business, BADR remains available for a further three years from cessation, provided the qualifying conditions were met at cessation. This grace period covers the typical timeline of an MVL or a phased asset disposal after closing the doors.

Worked example — 2025/26 disposal at 14%

Worked example — same sale, April 2026

Alternatives and adjacent reliefs

BADR is one of several CGT reliefs that can apply to a business disposal. Where BADR is unavailable or already used up, consider:

• Holdover Relief (s.165 / s.260 TCGA 1992):rolls a gift gain into the recipient's base cost so no tax is paid at the time of the gift. Useful in family business succession where the parent does not need the cash.
• Substantial Shareholding Exemption (SSE):available to companies (not individuals) disposing of qualifying trading subsidiaries. SSE exempts the gain entirely — see HMRC's manual CG65700+ for the conditions. Often relevant where shares are held through a personal holding company.
• EIS / SEIS deferral relief: reinvesting the gain into qualifying EIS / SEIS shares defers the CGT until disposal of the new shares.
• Rollover Relief (s.152 TCGA): rolls a gain on business assets into replacement business assets acquired within three years.

Why BADR claims fail

The five most common reasons HMRC denies a BADR claim:

1. 5% test failure on alphabet shares.The seller's share class has no automatic right to dividends across the company's full distributable reserves, or has no right to winding-up assets ahead of other classes.
2. Trading vs investment activities.A company is "trading" only if its non-trading activities are not "substantial" — HMRC's benchmark is 20% of activities, income, assets and management time. A consultancy holding £400k of surplus cash on its balance sheet against a £1m trading turnover can trip this test.
3. Mixed business and non-business assets. Where a disposal includes assets used outside the business (the company-owned holiday flat, the racehorse), apportionment strips those gains out of BADR — they fall back to the 24% rate.
4. Outside the 2-year qualifying period. Directors recently brought in before a sale, or share issues taking a person above 5% only weeks before completion.
5. Lifetime limit already used.A prior ER claim consumed the allowance and the seller had not retained the calculation. HMRC's records prevail.

Investor's Relief — the cousin of BADR

Investor's Relief (IR) is a separate CGT relief introduced in 2016 for external investors who subscribe for new ordinary shares in unlisted trading companies and hold them for at least three years. The investor must not be an employee or officer (broadly the opposite of BADR). The rate mirrors BADR: 14% from April 2025, rising to 18% from April 2026.

The Investor's Relief lifetime limit was reduced from £10m to £1 million for disposals on or after 30 October 2024 — bringing it into line with BADR. IR and BADR have separate £1m caps: an investor and an entrepreneur could in principle access £2m of qualifying gains at the reduced rate across the two reliefs.

Anti-avoidance — the TAAR on liquidations

HMRC has long worried that owners would liquidate a profitable company to extract reserves as a capital distribution (BADR at 14%) and then immediately start a similar trade through a new vehicle — a process known as phoenixing. The Targeted Anti-Avoidance Rule (TAAR), in s.396B ITTOIA 2005, re-characterises the capital distribution as an income distribution (taxed at dividend rates up to 39.35%) where:

1. The company is wound up by an MVL;
2. The recipient continues a similar trade or activity (directly, via a connected company, or as an employee) within two years of distribution; and
3. One of the main purposes of the winding up was the avoidance of income tax.

The two-year window catches more borderline cases than people expect — including consultancy work for a new firm in the same sector, or directorships in a connected company. Take advice before liquidating if you intend to continue working in the same field.

Pre-emptive planning around rate changes

The two-step rate increase has driven two waves of accelerated disposals:

• Late 2024 / early 2025: business owners completing share sales before 6 April 2025 to lock in the 10% rate. HMRC saw a sharp uptick in completion dates clustered in late March 2025.
• Late 2025 / early 2026: a second window before the 18% rate. Many owners with negotiated exits in train have been pulling completion forward to before 6 April 2026 to lock in 14%, banking a 4pp saving.

The key levers for timing are the contract's completion date and any deferred-consideration mechanism. Earn-outs that pay out across multiple tax years are sometimes restructured to crystallise the gain in the favourable year. Caution: HMRC has been alert to artificial completion-date manipulation, and the "forestalling" rules in the Autumn 2024 Budget's legislation specifically counter contract dates "backdated" to before 30 October 2024.

Where to find the official rules

The statutory basis for BADR is Part V Chapter 3 of the Taxation of Chargeable Gains Act 1992 (sections 169H–169S). HMRC guidance is in the Capital Gains Manual at CG63950 onwards, with the core qualifying conditions at CG64000+. The relevant gov.uk page is "Business Asset Disposal Relief"at gov.uk/business-asset-disposal-relief. SSE guidance is at CG65700+, EMI at ETASSUM50000+ and Investor's Relief in TCGA s.169VA–169VY.

Bringing it together

BADR is no longer the headline-grabbing 10% relief it once was. After two rate rises in eighteen months it is now a 14% rate (18% from April 2026) on at most £1 million of lifetime gains. But the structure — favouring real entrepreneurs over passive investors — remains, and the saving against the 24% standard CGT rate still runs to tens of thousands of pounds on most exits. The pitfalls are not the rate or the cap; they are the 5% test on company shares, the trading-vs-investment threshold and the 2-year qualifying period. Get any of those wrong and the entire claim falls away. As ever with CGT planning around a once-in-a- -lifetime transaction, get the structure right, document the qualifying conditions contemporaneously, and claim BADR explicitly on the Self Assessment return.