BADR in one paragraph: a CGT relief reducing the rate on qualifying business disposals to 14% in 2026/27 (was 10% before April 2025, rising to 18% from April 2026 per the Autumn Statement). Lifetime cap £1m of qualifying gains. Qualifies: trading company shares where you own 5%+ and have been an officer/employee for 2+ years; disposal of a sole-trader business; disposal of partnership share. Critically: investment companies don't qualify.
BADR rate trajectory
| Tax year | BADR rate | Equivalent CGT for £1m gain |
|---|---|---|
| Before April 2020 (top rate) | 10% | £100,000 |
| April 2020 - April 2025 | 10% | £100,000 |
| April 2025 - April 2026 | 14% | £140,000 |
| April 2026 - onwards | 18% | £180,000 |
| Standard CGT (residential property) | 18% / 24% | £180,000 / £240,000 |
| Standard CGT (other assets) | 18% / 24% | £180,000 / £240,000 |
The 2025-2026 rate hike from 10% to 14% to 18% represents an 80% increase in BADR liability over 14 months. Any qualifying disposal that can be structured before April 2026 saves real money.
Who qualifies for BADR?
You must meet ALL of these tests:
- Trading company test: the company must be a trading company or the holding company of a trading group. Investment companies, including CICs, do NOT qualify.
- 5% personal company test: you must own at least 5% of the ordinary share capital, hold at least 5% of voting rights, AND have rights to at least 5% of distributable profits and assets on a wind-up.
- 2-year qualifying period: all the above conditions must have been met throughout the 2 years immediately before the disposal.
- Officer or employee: you must have been an officer (director) or employee of the company throughout the 2-year period.
Each test is strict. Failure on any one disqualifies the entire claim.
What disposals qualify?
- Sale of shares in a trading company where the 5% / officer / 2-year tests are met.
- Disposal of a sole-trader business as a going concern.
- Disposal of an interest in a partnership.
- Associated disposal: a personal asset used in the trade (e.g., a property owned by the director and rented to the company) disposed of alongside the main business disposal can also qualify, subject to specific rules.
- Members' Voluntary Liquidation (MVL): the capital distributions on wind-up count as disposal of shares and qualify if all conditions are met.
The lifetime cap of £1,000,000
BADR is capped at £1,000,000 of qualifying gains in your lifetime. Once you've claimed the full £1m relief, further gains are taxed at standard CGT rates.
Important: the £1m is total gains, not per disposal. Multiple disposals can be combined until the cap is reached.
Pre-2020 the lifetime cap was £10m, then briefly £1m, then back to £10m, then back to £1m from March 2020. The current £1m cap looks likely to persist — the relief has been a focus of consecutive Budget revenue raising.
Worked example: comparing rates
Director sells trading company shares for £800,000 above her base cost in May 2026 (just within the £1m cap). Qualifies for BADR.
| If disposed in... | Rate | CGT due | Net proceeds |
|---|---|---|---|
| March 2025 (just before BADR rate rise) | 10% | £80,000 | £720,000 |
| May 2025 (post first rise) | 14% | £112,000 | £688,000 |
| May 2026 (post second rise) | 18% | £144,000 | £656,000 |
| Disposal without BADR (e.g., investment company) | 24% | £192,000 | £608,000 |
Timing matters enormously. The difference between selling in March 2025 vs May 2026 on the same gain: £64,000.
Why investment companies don't qualify
The trading company test specifically excludes companies that are "wholly or mainly" investment companies (the CIC definition from a different statutory test). Specifically:
- Property letting companies: usually fail the trading test for BADR (just like for CIC).
- Shareholdings held passively: a company that's just an investment vehicle fails.
- Mixed trading/investment: depends on the percentage split — HMRC tends to apply a "more than 20% investment activity" test.
If your business has both trading and investment elements, restructuring to separate them can preserve BADR on the trading part.
Anti-avoidance: the "alphabet shares" issue
Some director-shareholders historically used multiple share classes to direct dividends to family members. If those share classes don't give you genuine rights to 5% of both profits and assets on wind-up, BADR may fail.
HMRC scrutiny intensified after the 2018 Supreme Court decision in Mt v HMRC on the strict interpretation of the 5% test. Many "growth share" schemes from the 2010s now potentially fail.
If your shareholding has been complicated by past restructuring, get specialist advice before relying on BADR.
Planning options
- Pre-April-2026 disposals: structure to dispose before April 2026 to lock in the 14% rate before it rises to 18%.
- Use both spouses' lifetime caps: couples can each have £1m of BADR. Transfer shares to spouse before disposal (no CGT on spouse transfer; spouse then disposes using their own cap). Spouse must independently meet the BADR conditions (5% holding, officer/employee for 2 years).
- Time multiple disposals: if you have multiple BADR-eligible disposals, plan the order to use the £1m cap efficiently.
- Avoid CIC drift: a trading company that drifts into investment status loses BADR eligibility. Maintain genuine trading activity.
- Combine with MVL on closure: if winding up a trading company, MVL with BADR delivers the maximum benefit at low rates.
Common BADR mistakes
- Failing the 2-year qualifying period. Recent share acquisitions, recent appointments as director, all reset the clock.
- Not meeting the 5% on all three measures. Many alphabet-share schemes fail the "5% of distributable profits" test.
- Disposing of an investment company. No relief, standard CGT applies.
- Triggering the phoenixing TAAR on MVL. Continuing similar trade within 2 years can claw back BADR.
- Missing the timing window before April 2026. The 14% to 18% rise on April 2026 disposals is a 28% increase in tax due.
- Forgetting to claim in the right year. BADR must be claimed on or before the first anniversary of the 31 January following the tax year of disposal.
Sources
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- Dividend tax calculator
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- Close investment companies
- Associated companies and CT bands
- Optimal extraction by profit level
- Employer pension contributions
- Closing a company: strike-off vs MVL
- Business Asset Disposal Relief
- Dividend waivers and settlements
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