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Business Services  •  Business Tax  •  Personal tax

Understanding Business Asset Disposal Relief (BADR)

By RJP LLP on 26 October 2023

Business Asset Disposal Relief (BADR) offers reasonable tax relief for business owners and shareholders but there are strict qualifying criteria that must be met in order to qualify.

BADR replaced Entrepreneurs’ Relief (ER) in April 2020 and although it is not as generous as ER, it is certainly a reward for the financial and personal risks involved in growing your own business or company. It offers the opportunity to pay capital gains tax at the rate of 10% on the first £1m of qualifying gains, rather than 20%, therefore it provides a maximum tax relief of £100,000, whereas the maximum relief available with ER was £1m (up to £10m of gains taxed at 10%).

The qualifying criteria have also become stricter than they were under the ER regime.

BADR applies to the disposal of the following assets:

Business assets such as an interest in a partnership of the disposal of a sole trade business

  • The business must have been owned throughout the two year period ending with the date of disposal. The disposal must represent either the whole of the business or a part of the business that is capable of being carried on in its own right.
  • Property businesses are not eligible for BADR with the exception of those qualifying as a furnished holiday letting business.

An asset used in a business

  • The asset must be disposed of at the same time the business ceases to be carried on, or within three years of the cessation. The asset only needs to have been used by the business at the time of cessation, not necessarily throughout two years prior.

Disposal by a director or employee of shares in the company they work for

  • The shareholder must be an employee or officer of the company or another company within the same group for a two year period leading up to the date of disposal;
  • They must have owned at least 5% of both the ordinary shares and voting rights of the company and either:
    • Be beneficially entitled to at least 5% of the company’s distributable profits and 5% of the assets on a winding up; or
    • Be entitled to at least 5% of the proceeds on the sale of the company’s entire ordinary share capital. In determining whether this test is met at any time within the necessary two year period, the whole of the ordinary share capital is deemed to be sold at its market value on the last day of the two year period.
  • The above rules are relaxed for individuals who have acquired their shares under EMI option; the two year share ownership period is deemed to commence when the option is granted rather than when the shares are acquired, and the 5% minimum share ownership requirement does not apply.
  • The company must be a trading company or the holding company of a trading group.

If you would like advice on accessing BADR (Business Asset Disposal Relief) contact us via partners@rjp.co.uk.

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