Business Asset Disposal Relief 2026/27: Qualifying Conditions, 14% Rate and Planning

What Is Business Asset Disposal Relief?

Business Asset Disposal Relief (BADR), previously known as Entrepreneurs' Relief until April 2020, is a CGT relief that reduces the rate of tax on qualifying gains from business disposals. For disposals on or after 6 April 2025, the BADR rate is 14%, it was 10% from 2020 to October 2024, increased to 14% from 30 October 2024 onwards. Without BADR, a higher-rate taxpayer would pay 24% on the same gain. On a £500,000 qualifying gain, BADR saves £50,000 in CGT.

BADR applies to a lifetime limit of £1,000,000 of qualifying gains per individual. This limit applies across all qualifying disposals throughout your entire life, it is not reset annually. Once the £1 million limit is exhausted, any further gains from business disposals are taxed at the standard rates of 18% or 24%. The limit was reduced from £10 million to £1 million in April 2020.

The relief applies to disposals of shares in a qualifying personal company, business assets used in a sole trade or partnership, and the disposal of a business or part of a business. The most common route in practice is the disposal of shares in a company that the individual works in and owns at least 5% of.

Qualifying Conditions for Shares in a Personal Company

To claim BADR on shares in a personal trading company, all of the following conditions must be met throughout the two years immediately before the date of disposal: you must hold at least 5% of the ordinary share capital of the company; those shares must carry at least 5% of the voting rights; you must be an officer (director) or employee of the company; the company must be a trading company or the holding company of a trading group (not an investment company); and you must be entitled to at least 5% of the company's distributable profits and assets on winding up.

The two-year qualifying period is strict. If you set up a company and sell it 18 months later, BADR is not available on the sale. If the company was set up more than two years ago but you only became a director 18 months ago, BADR may not be available. The qualifying period is measured up to the date of disposal, if you sell your shares by agreement and they are purchased on completion, the qualifying period must run up to completion.

The trading condition requires the company's activities to be substantially trading, broadly, at least 80% of the company's activities (by reference to assets, income and time) should be trading rather than investment activities. A company that holds significant investment property or large cash balances may fail the trading test, even if it also has active trading operations. This is an area where professional advice is essential before disposal.

Dilution Risk, Protecting the 5% Threshold

One of the most significant risks to BADR eligibility is dilution below the 5% shareholding threshold. This commonly arises when a company raises external investment, an employee share scheme, a SEIS/EIS funding round, or a strategic investor taking shares. If a new share issue dilutes your holding from 7% to 4%, you immediately lose BADR eligibility on any future gain.

HMRC provides a valuable anti-dilution protection: where your shares were diluted below 5% due to a qualifying share issue (broadly, a commercial share issue not designed to dilute CGT reliefs), you can make an election to treat your shares as disposed of and immediately reacquired at market value at the point your holding fell below 5%. This crystallises a gain while BADR still applies, at the pre-dilution value. The election must be made within the normal Self Assessment time limits. Planning ahead of a funding round, quantifying the gain and making the election promptly, is essential for business owners facing dilution.

Worked Example: BADR vs Standard CGT Rates

James founded a technology consultancy in 2018, owning 60% of the shares throughout. In 2026/27 he sells his shares for £800,000. His acquisition cost was £10,000. Gain = £790,000. He has used £200,000 of BADR lifetime limit previously. Remaining BADR limit: £800,000. But the gain is only £790,000, so all of it qualifies for BADR (it does not exceed the remaining £800,000 limit).

CGT with BADR: £790,000 × 14% = £110,600. His income for the year is £80,000, putting him in the higher-rate band. Without BADR, the CGT would be £790,000 − £3,000 (AEA) = £787,000 × 24% = £188,880. The BADR saving: £188,880 − £110,600 = £78,280. Note that BADR gains are not reduced by the AEA, the AEA is not applied against BADR gains separately.

Important: BADR is claimed through Self Assessment, in the year the disposal occurs. You make the claim on the Capital Gains pages (SA108). If you fail to make the claim in the relevant tax year's return (within the amendment window, usually four years), the relief is permanently lost.

Investor's Relief, BADR for External Investors

A related relief called Investors' Relief provides a 14% CGT rate on gains from shares in unlisted trading companies for external investors who are not employees or directors of the company. The conditions are different from BADR: the shares must have been subscribed for (not acquired from another shareholder), held for at least three years from 6 April 2016, and must be in an unlisted trading company. The lifetime limit for Investors' Relief is separate from BADR, also £1,000,000.

Investors' Relief is less commonly used than BADR but valuable for angel investors and seed investors who have held qualifying shares since 2016 or later. The three-year minimum holding period and the requirement that shares were originally subscribed for (not purchased) limits the scope, but for those who qualify, the rate saving versus the standard 24% is substantial.