UK Business Asset Disposal Relief (BADR) (2026/27)

BADR rate trajectory

The rate rose from 10% to 14% on 6 April 2025 and to 18% on 6 April 2026, so the tax on the same qualifying gain is now 80% higher than it was before April 2025. From 6 April 2026 the BADR rate is the same as the lower main rate of Capital Gains Tax (18%).

Who qualifies for BADR?

You must meet ALL of these tests:

1. Trading company test: the company must be a trading company or the holding company of a trading group. A company whose main activities are non-trading, such as holding investments, does NOT qualify.
2. 5% personal company test: you must hold at least 5% of the ordinary share capital and, through that holding, at least 5% of the voting rights. You must ALSO be entitled to either at least 5% of the profits available for distribution and 5% of the assets on a winding up, or at least 5% of the proceeds if the whole ordinary share capital were sold.
3. 2-year qualifying period: all the above conditions must have been met throughout the 2 years immediately before the disposal.
4. 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.

The £1m limit applies to disposals on or after 11 March 2020. Before that the limit was £10m (from 6 April 2011); it started at £1m in April 2008 and rose to £2m and then £5m during 2010. Gains on which you have already claimed the relief count towards the limit that applies when you make a new disposal, and any qualifying gain above it is taxed at the normal Capital Gains Tax rates (HMRC helpsheet HS275).

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.

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

For BADR on shares, the company must be a trading company: one that carries on trading activities and whose activities do not include "to a substantial extent" activities other than trading (section 165A of the Taxation of Chargeable Gains Act 1992). GOV.UK puts it as the company's main activities being in trading rather than non-trading activities like investment. In practice:

• Investment vehicles: a company that mainly holds investments rather than trading fails the test.
• Mixed trading and investment: there is no fixed percentage in the law. HMRC's Capital Gains Manual (CG64090) looks at indicators such as non-trading income, the asset base, and the time and expenses officers and employees spend on non-trading activities, weighed together over time. It says that where non-trading income and assets do not suggest the non-trading element exceeds 20%, the case is unlikely to warrant more detailed review.

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 your shares do not give you at least 5% of the ordinary share capital and voting rights, plus either at least 5% of both the distributable profits and the assets on a winding up or at least 5% of the proceeds if the whole ordinary share capital were sold, BADR may fail.

The test was tightened for disposals on or after 29 October 2018. As well as 5% of the ordinary share capital and voting rights, you must now have an economic interest: either 5% of distributable profits and 5% of the assets available on a winding up, or 5% of the proceeds if the whole ordinary share capital were sold at market value (HMRC Capital Gains Manual CG64051).

If your shareholding has been complicated by past restructuring, get specialist advice before relying on BADR.

Planning options

• Rate now 18%: the 14% rate applied only to disposals up to 5 April 2026, so a sale plan worked out at 10% or 14% needs to be recalculated at 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 investment drift: a trading company whose non-trading activities become substantial 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 every part of the 5% personal company test. You need 5% of the ordinary share capital, 5% of the voting rights, and one of the two economic tests: 5% of the distributable profits and of the assets on a winding up, or 5% of the proceeds on a sale of the whole ordinary share capital. Alphabet-share schemes can fail the distributable profits test, in which case the sale proceeds test is the one to check.
• 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.
• Using an old rate. Disposals on or after 6 April 2026 are taxed at 18%, not the 10% or 14% rates quoted in older guides.
• 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

• gov.uk — Business Asset Disposal Relief
• gov.uk — HS275 Business Asset Disposal Relief (2026)
• HMRC CG64000 — BADR manual
• gov.uk — Autumn Budget 2024 (BADR rate changes)

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