Introduction 

Business Asset Disposal Relief (BADR) is a Capital Gains Tax (CGT) relief which reduces the CGT rate on qualifying gains made on disposal of eligible business assets from 20% to 10%. Various conditions must be met. Broadly, BADR is available to individuals who are actively involved in a business, whether this is a sole trader, a partner in a partnership or via a company.  

Each individual is able to claim BADR on up to £1 million of gains in a lifetime which can result in a tax saving of up to £100,000. Trustees can claim BADR if certain conditions are met, which include the trust having an interest in a business in which a trust beneficiary is personally eligible for BADR.  

This note contains a high-level overview of BADR as it applies to individuals’ interests as sole traders and partners. BADR is also available on qualifying interests in trading companies. A separate note on this point is available on request. 

A different relief, investors’ relief, is available in certain circumstances and also results in a 10% CGT rate. Broadly, BADR is relevant to individuals who are actively involved in a business whereas investors’ relief is relevant to individuals who are not so involved. A separate briefing note on investors’ relief is available on request. 

Minimum period over which the BADR conditions must be met

• Various conditions must be met throughout a minimum period immediately preceding a disposal of business assets in order for BADR to be available. This period is currently normally two years.  
• BADR remains available on assets that qualify for BADR if the business ceases, provided the assets are disposed of within the three years following cessation and the business was carried on for a minimum period of two years pre cessation.   
• Different time periods can be relevant in some cases, such as on disposal of personally owned assets used by a partnership carrying on a business.  

Conditions that must be met in order to qualify for BADR

• BADR can be claimed on gains made on the disposal of the whole or part of a business carried on by an individual, either on his or her own or in partnership with others. Mere disposal of an asset used in a continuing business does not qualify without a part or whole disposal of the business. 
• As noted, BADR can be claimed on disposal of assets that were used in a now-ceased business in respect of which the individual was eligible for BADR, subject to meeting the above mentioned minimum period. Additional conditions apply to personally owned assets used by a partnership. 

Personally owned assets used by a partnership 

• BADR may be available on gains made by an individual on the disposal of personally owned assets used by a partnership for at least two years before disposal. 
• For BADR to be available, the individual must be eligible for BADR on his or her interest in the partnership. BADR in this case is only available where the disposal is made as part of the individual’s withdrawal from the business and provided the individual also disposes of at least a 5% interest in the assets of the partnership.
• BADR is also available to individuals on disposal of assets used by a partnership in cases where the individual has less than a 5% partnership interest, provided the individual disposes of their entire partnership interest and had at least a 5% partnership interest for a continuous period of three of the eight years preceding the disposal. 
• In addition to the above conditions being met, the asset disposed of must have been owned for at least three years immediately preceding the disposal. 
• Relief is restricted on a just and reasonable basis where:

o The asset was not used in the business throughout the ownership period, or;

o The asset was only used partly for business purposes, or;

o The individual charged the business rent for use of the property. 

Trusts

BADR is only available on the disposal of trust business assets where an individual is entitled to the income received by the trust from the business assets in question (an ‘interest in possession’), and provided that individual qualifies for BADR on the business on his or her own account. 

Trustees may be able to claim BADR within the three years following cessation of the sole trade business or partnership trade, provided the usual BADR conditions are met and provided that the aforementioned individual ceases carrying on the business within that three year period. 

Lifetime limit

Each individual is able to claim BADR on a maximum of £1 million of gains in a lifetime which can result in a tax saving of up to £100,000 (or £200,000 for a couple). There is no requirement to use the entire lifetime limit on one transaction; instead BADR can be claimed throughout an individual’s lifetime as qualifying gains arise. 

BADR claims on trust gains use part or all of the lifetime limit of the beneficiary who personally qualifies for BADR.  

Gains realised in excess of the available lifetime limit are taxable at the prevailing CGT rate, which is currently 20% for higher and additional rate taxpayers and trustees on most gains (a 28% rate applies on residential property and carried interest gains). 

Claiming BADR

BADR must be claimed by the second 31 January following the end of the tax year in which the qualifying gain arose. If BADR is to be claimed on trust gains, the trustees and beneficiary whose lifetime limit will be used must make a joint election. The deadline to claim BADR on gains realised in 2022/23 is 31 January 2025 and gains realised in 2023/24 is 31 January 2026. 

Points to note

• Taxation of capital gains can be deferred to a later date when a qualifying Enterprise Investment Scheme (EIS) investment is made. BADR can be claimed when deferred capital gains become chargeable, provided the gain was eligible for BADR when it was realised and provided the gain was originally realised after 2 December 2014. BADR is claimed when the gain comes back into charge. The lifetime limit was historically higher than £1million, and the reduced £1 million lifetime limit applies to deferred gains that come back into charge, even if the BADR eligible gain originally arose when the lifetime limit was higher. 
• There are a small number of other cases where BADR may be available on a deferred gain coming back into charge. 
• When a business is incorporated and the requisite conditions are met, no chargeable gain is triggered on the disposal of the individual’s interest in the business in exchange for shares in a new company. Instead, the individual will be liable to CGT if they realise a capital gain on an eventual disposal of their shares. It is possible to opt out of this automatic relief on incorporation, which may be preferred where BADR is available at the date of incorporation but is unlikely to be available in the future. BADR is restricted in some circumstances to the extent that a gain realised on incorporation relates to goodwill.