What Is Business Asset Disposal Relief and Who Qualifies

Introduction

Business Asset Disposal Relief, previously known as Entrepreneurs’ Relief, allows individuals to pay a reduced rate of Capital Gains Tax (CGT) when disposing of qualifying business assets. It was introduced to encourage entrepreneurship by rewarding those who have built up a business over time.

If you meet the conditions, you will pay CGT at a rate of 10 percent on qualifying gains, rather than the standard rate of 20 percent for higher rate taxpayers.

How Business Asset Disposal Relief works

When you sell or dispose of a business or shares, you normally pay CGT on the profit you make. Business Asset Disposal Relief reduces the tax rate to 10 percent on qualifying gains, up to a lifetime limit of £1 million.

This lifetime limit applies across all claims you make for BADR. Once you have used the full £1 million of qualifying gains, further disposals are taxed at the normal CGT rates.

The relief applies to disposals of:

The whole or part of a business you own as a sole trader or business partner.

Assets used in a business when it closes.

Shares in a personal trading company.

The key is that the business or shares must meet specific ownership and trading conditions at the time of sale.

Who qualifies for Business Asset Disposal Relief

1. Sole traders and business partners

If you operate as a sole trader or in a business partnership, you may qualify when you sell all or part of your business. To claim the relief:

You must have owned the business for at least two years before the sale.

The business must be a trading business, not an investment business.

You must be selling the whole business or a distinct part of it capable of operating independently.

If you sell individual assets but continue trading, you will not usually qualify unless the disposal is part of winding down the business.

2. Company directors and shareholders

If you are selling shares in a company, you may also qualify, but the conditions are slightly different. You must:

Own at least 5 percent of the company’s ordinary share capital.

Be entitled to at least 5 percent of voting rights.

Be entitled to at least 5 percent of distributable profits and assets on winding up (sometimes called the 5 percent economic test).

Have been an employee or officer of the company for at least two years.

The company must be a trading company or the holding company of a trading group.

If the company has stopped trading, you must sell your shares within three years to qualify for relief.

3. Assets used in a business

You may also qualify when selling assets such as buildings, machinery, or goodwill used in your business. To qualify:

The asset must have been used in your sole trade or partnership business.

The disposal must happen within three years of the business closing.

You must have owned the asset for at least two years before the business ceased trading.

If you rent out the asset after the business closes, the relief may be restricted or lost altogether.

What counts as a trading business

To qualify for BADR, your business must be primarily trading rather than holding investments. This means that:

More than 80 percent of the business’s activities should involve trading.

The business should not mainly earn income from passive investments such as rent, dividends, or interest.

Examples of qualifying trading businesses include shops, manufacturers, professional services, and contractors. Property letting or investment businesses normally do not qualify.

When the relief does not apply

You cannot claim BADR if:

The business or company is mainly investment-based.

You sell shares in a company where you hold less than 5 percent ownership.

You are disposing of assets that were not used for trading.

You have already exceeded the £1 million lifetime limit.

You sell assets to a connected company or individual under certain conditions designed to prevent tax avoidance.

How to claim Business Asset Disposal Relief

You claim BADR through your Self Assessment tax return. To do this:

Complete the Capital Gains Summary (SA108) section, listing your qualifying disposal.

Tick the box for Business Asset Disposal Relief.

Provide details of the business, shares, or assets sold.

If you do not usually complete a Self Assessment return, you can write to HMRC to make a claim. The claim must be made by the first anniversary of the 31 January following the end of the tax year of disposal.

For example, if you sold your business in June 2024, you must claim by 31 January 2027.

Example of how BADR works

Sarah sells her business in 2025 for £900,000. She bought it for £400,000 ten years ago, making a gain of £500,000.

Because she meets the qualifying conditions, she claims Business Asset Disposal Relief. Her £500,000 gain is taxed at 10 percent, resulting in a £50,000 tax bill.

If she did not qualify for the relief, she would pay CGT at 20 percent, which would mean £100,000 in tax instead.

Tips to ensure you qualify

Keep clear records of ownership, employment, and trading activity.

Check that the company meets the 5 percent conditions for at least two years before selling.

Plan your sale carefully if the business has both trading and investment elements.

Take advice before restructuring or winding down a business to ensure relief is not lost.

Common mistakes to avoid

Selling shares too soon after becoming a director or shareholder.

Assuming rental or investment businesses qualify as trading.

Forgetting to make the claim before the deadline.

Exceeding the £1 million lifetime limit without realising it.

Conclusion

Business Asset Disposal Relief is a valuable way to reduce the Capital Gains Tax due when selling a business or shares, but strict qualifying conditions apply. You must have owned and been involved in the business for at least two years, and the company must be genuinely trading.

By understanding the rules and keeping thorough records, you can make the most of this relief when the time comes to sell. If your situation is complex, consulting a qualified accountant or tax adviser can help you ensure that you qualify and that your claim is submitted correctly and on time.