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 as a sole trader, 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 trustees 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 interests in companies. A separate briefing note on BADR in the context of sole trades and partnerships is available. 

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 also available. 

Minimum period over which the BADR conditions must be met

• Various conditions must be met throughout a minimum period immediately preceding a disposal of shares or securities in order for BADR to be available. This period is currently normally two years.
• BADR remains available following cessation of trade, provided the individual’s business assets are disposed of within the three years following cessation and the trade 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 trading company.   

Conditions that must be met in order to qualify for BADR

BADR is available on gains made on the disposal of shares or securities in a trading company, or the holding company of a trading group, provided the individual is an officer or employee and meets all three of the following conditions that comprise the “5% test”:  

1. The individual must own at least 5% of the ordinary share capital in the company, and; 

2. By virtue of that shareholding, be able to exercise at least 5% of the voting rights in the company, and;

3. Either or both of the following conditions are satisfied: 

a. The individual, by virtue of his or her ordinary shareholding, must (broadly) be entitled to receive at least 5% of amounts available for distribution to “equity holders” of the company, and at least 5% of amounts that would be payable to equity holders on a winding up, and/or; 

b. The individual would reasonably expect to receive at least 5% of the sale proceeds if the entire ordinary share capital of the company was sold for market value, assuming that any arrangements with a main purpose of falling into or out of any aspect of the BADR legislation were ignored. 

The point around selling the entire ordinary share capital of the company is a valuation method which means that minority discounts that may otherwise apply when valuing an individual’s shares in a company are ignored. It is not necessary for the entire company to be sold for this condition to be met.   

Condition 3a was imported from corporate tax legislation and can lead to unexpected results in the context of individuals. 

Notably: 

• The term ‘equity holder’ encompasses both ordinary shares, as defined for corporate tax purposes, and certain non commercial loans. This definition differs from the definition of ordinary share capital that otherwise applies for BADR purposes. Therefore individuals may have different percentage interests for the purposes of the different BADR tests. 
• It may not be possible to satisfy condition 3a if the directors have discretion over on which share class to pay dividends.

The potential application of condition 3b will often be more straightforward to assess than the application of condition 3a. 

Cessation of trade

BADR remains available following cessation of trade by the trading company in which the individual holds shares and potentially other interests, provided the BADR conditions were met for at least two years prior to trade ceasing and the interest(s) in the company on which BADR is to be claimed are disposed of within three years of cessation. 

Share exchanges

• In qualifying cases, when shares in one company are exchanged for shares or securities in another company, the capital gain that would otherwise have been realised at the point of exchange may be automatically deferred until a subsequent disposal of the new shares and/or securities. BADR will only be available on a future disposal if the individual meets the BADR requirements at that time. 
• If the individual is eligible for BADR at the point of exchange but does not expect to be so eligible on a future disposal, he or she may prefer to elect out of the automatic deferral of capital gain, such that CGT would be payable on the gain realised at the point of exchange. This would enable BADR to be claimed on the gain. The deadline for making such an election aligns with the time limit for claiming BADR, as set out below.  
• Such elections should be carefully considered before being made, particularly with regards to the cash flow impact and the position should a loss arise on a future disposal. 

Dilution of shareholding on issue of further shares

• Because the tests for BADR need to be satisfied for a two year period prior to disposal, BADR could cease to be available if an individual’s shareholding is diluted below 5% due to a company issuing further shares. 
• If the further share issue is made for commercial reasons, BADR remains available on the gain accrued on shares or securities up to the point an individual’s shareholding falls below 5% due to the share issue. 
• Retention of BADR is subject to the individual making an election to realise a deemed capital gain at the point of dilution. The gain is calculated as though the individual had sold his or her shares and securities for market value, with market value calculated based on the amount that would be receivable if the entire company were sold. As for condition 3b above, this means that the discounts which would normally apply when valuing minority shareholdings are not applicable.  
• A further election can be made to defer taxation of the deemed gain until a future disposal of the shares. 
• This relief is not available to trustees, nor is it possible to make an election in order to claim BADR on gains accrued on personally owned assets used by the company (see below). 

Personally owned assets used by a trading company

• BADR may be available on gains made by an individual on the disposal of personally owned assets used by a trading company for at least two years before disposal. 
• For BADR to be available, the individual must be eligible for BADR on a personal shareholding in the company. 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: 

o At least 5% of the ordinary share capital of the company which satisfy all elements of the 5% test, or;

o Securities, which constitute at least 5% of the value of securities of the company. 

• Furthermore, the disposed of asset 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 a personally owned shareholding in the company. 

Trustees may be able to claim BADR after a company in which they have an interest ceases to trade, assuming that the BADR conditions set out above were met prior to cessation of trade. 

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 2023/34 is 31 January 2026. The same deadline applies to elections that may be made on share exchanges, as set out above. 

As noted above, individuals whose shareholding is diluted below 5% due to a share issue can retain BADR on the gain accrued up to the point of dilution, subject to making an election. The deadline for this is the usual BADR time limit as set out above. A second election can be made to defer the CGT due. The deadline for this election is four years from the end of the tax year of dilution. In practice, it is likely that both elections would be made at the same time, so the aforementioned 31 January deadline is the relevant date. 

Points to note

• There is no aggregation of spousal ownership, so if one spouse owns 3% of the ordinary shares and voting rights in a company and the other spouse owns 4%, neither spouse will qualify for relief.
• Part-time workers are eligible for BADR, as there are no set rules about how many hours an individual must work in order to qualify for BADR. He or she must genuinely undertake at least some work for the business. 
• The 5% test does not need to be met in respect of shares acquired through the exercise of EMI options after 5 April 2012. The ownership period for BADR purposes is deemed to begin on grant of the EMI option(s). 
• 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 £1 million, and the reduced 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 if 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 and the individual satisfies any aspect of the 5% test.