What Is Business Asset Disposal Relief & How Does It Work?
Business Asset Disposal Relief (BADR), formerly known as ‘Entrepreneurs Relief’, is a form of tax relief that reduces the amount of Capital Gains Tax (CGT) that individuals are required to pay on the disposal of qualifying business assets. The measure was introduced in 2008 as a government incentive to encourage entrepreneurs to start their own businesses by reducing the financial risk and burden of doing so.
In recent years, there has been much concern that Business Asset Disposal Relief would be scrapped or changed. These concerns came partially to fruition in the Autumn Budget 2024, in which it was announced that the rate of BADR would increase from April 2025 onward. Understanding how the tax relief works in light of these changes is key if you think it could be relevant to you and your business.
How Does Business Asset Disposal Relief Work?
When a director or shareholder sells or closes their company, they are required to pay Capital Gains Tax on any gain made on their investment. Business Asset Disposal Relief helps to lighten this burden by applying CGT at a discounted rate.
As of the 6th April 2025, the rate of Capital Gains Tax paid under Business Asset Disposal Relief increased. Prior to this date, the rate was 10% on all gains on qualifying assets if you closed down or sold your business. The rate is now:
- 14% on all gains on qualifying assets disposed of from the 6th April 2025. It will then increase to 18% on all gains on qualifying assets disposed of from the 6th April 2026
The reduced rate is capped at gains of up to £1 million; despite much speculation, this cap has not changed since March 2020.
However, in spite of these restrictions and changes, Business Asset Disposal Relief is still a significant tax break that businesses can benefit from. Without it, you could expect to pay as much as 32% Capital Gains Tax on funds distributed from the business upon sale or closure; this is significantly higher than the current 14% BADR rate.
Eligibility Criteria
In order to qualify for Business Asset Disposal Relief, you must be a sole trader, business partner or employee (and shareholder) of the company who is selling all or part of the business. There are different eligibility criteria depending on whether you are selling or closing the company, or selling shares in the company.
If you are selling the company you must:
- Have been the sole trader or business partner for at least 2 years
- Have owned the business for at least 2 years
This is where Business Asset Disposal Relief is beneficial for companies who choose to close down their company via a Members’ Voluntary Liquidation (MVL), by allowing them to do so in a tax efficient way.
Shareholders can also apply for BADR via a voluntary company strike-off, so long as their reserves do not exceed £25,000. Should they exceed this limit, they will need to close the company via an MVL to avoid funds being distributed as income for tax purposes.
If you are selling shares in the company you must:
- Have have held 5% or more of the share capital of the company and 5% of voting share capital for at least 12 months prior to making a claim
- Have owned the shares for at least 2 years
- Have been an employee or office holder of the company for at least two years (when selling shares you are not required to have owned the business)
- Be a trading company, meaning that “non-trading” activities such as investments, don’t make up more than 20% of your income
How To Access Business Asset Disposal Relief
If you think you might qualify for Business Asset Disposal Relief and are interested in closing your company via an MVL, speaking to a licensed insolvency practitioner is key. At My Liquidation, our experienced team can help you navigate the rules and criteria surrounding BADR and guide you through the MVL process with a focus on tax efficiency. Whether you want to act quickly to lock in the current rates or need to understand if your business is eligible, simply get in touch with us today to discuss your matter further.
