Business Asset Disposal Relief (BADR): The Complete Guide for 2026

For business owners and investors disposing of qualifying business interests, Business Asset Disposal Relief (BADR) — formerly known as Entrepreneurs' Relief — represents one of the most valuable reliefs in the UK tax system. An 18% Capital Gains Tax rate (for 2026/27), compared with the standard 24% rate for higher-rate taxpayers, can save up to £60,000 on a qualifying disposal within the £1m lifetime limit.

Understanding who qualifies, what qualifies, and how to protect eligibility is essential planning for any business owner approaching a sale or exit.

What Is BADR and What Rate Does It Apply?

BADR charges qualifying gains at a flat 18% CGT (2026/27 rate) regardless of the taxpayer's marginal rate, rather than at the standard 24% that higher and additional-rate taxpayers would otherwise pay. It therefore delivers a meaningful saving only for higher and additional-rate taxpayers; basic-rate taxpayers already pay 18% on share disposals. It applies on the first £1 million of qualifying lifetime gains per individual.

The lifetime limit was reduced from £10 million to £1 million in the March 2020 Budget. Any gains claimed under the previous Entrepreneurs' Relief limit (now absorbed into the BADR history) count against the £1m lifetime limit.

Rate history: 10% to April 2025; 14% in 2025/26; 18% from April 2026.

Maximum saving (2026/27): Up to £60,000 (6% saving on £1m of gains where the alternative rate would be 24%).

Who Can Claim BADR?

1. Sole Traders and Partners in a Trading Partnership

A sole trader or partner disposing of their business (or an interest in it) can claim BADR provided:

• The business is a trading business (or was at the time it ceased);
• The individual has been a sole trader/partner throughout the two years ending on the date of disposal (or two years before the business ceased, for a disposal within three years of cessation).

2. Disposals of Company Shares

For a disposal of shares in a company, the individual must satisfy all of the following conditions throughout the two years ending on the disposal date:

• 5% shareholding: The individual holds at least 5% of the ordinary share capital and at least 5% of the voting rights;
• Employee or officer: The individual is an employee or officer (including non-executive director) of the company (or of a group company);
• 5% of distributable profits and assets: From April 2019, a further test was added: the individual must be entitled to at least 5% of the profits available for distribution and 5% of the assets available to ordinary shareholders on a winding-up.
• Trading company or holding company of a trading group: The company must be a qualifying trading company (not mainly an investment company).

3. Associated Disposals

An associated disposal — disposal of a personally-owned asset used in a business or by the qualifying company — can also qualify for BADR, but only alongside a disposal of business interests that itself qualifies, and with various restrictions.

The Two-Year Qualifying Period

The two-year period is calculated backwards from the date of disposal. This means:

• If you have held shares for less than two years, no BADR is available on those shares.
• If the company was acquired by a purchaser via an earn-out (deferred consideration), the disposal date for the initial shares is the date of the sale, not the date of final payment — so the two-year clock runs to the completion date.
• Where shares are acquired in stages (e.g., growth shares or shares from SAYE exercise), each tranche must have its own qualifying period independently assessed.

Dilution: Protecting the 5% Threshold

One of the most common BADR pitfalls for company founders is dilution below 5%. If a funding round issues new shares to investors and the founder's holding falls below 5%, the BADR qualifying conditions are no longer met — and the two-year clock effectively restarts for the purpose of the test.

Pre-dilution BADR election: To protect against this, the legislation provides for a Business Asset Disposal Relief election (sometimes called a "frozen gain election"). Before the diluting event, the founder makes a formal election to treat the shares as if they had been disposed of and immediately reacquired at current market value. This crystallises the gain up to the point of dilution as a qualifying BADR gain — taxed at the BADR rate for the year of election — while the shares continue to be held.

The election in practice:

1. Obtain a fair market valuation of the shares before the diluting round;
2. File the election with HMRC — this must be made by the first anniversary of 31 January following the tax year in which the diluting event occurs;
3. The elected gain is taxed in the year of election at the applicable BADR rate (18% for 2026/27, subject to the lifetime limit);
4. The shares' base cost for future CGT purposes is stepped up to the valuation at election.

This mechanism protects the BADR value of gains accrued to date, even if future growth (after dilution below 5%) does not qualify.

Growth Shares and EMI Options

Growth shares (shares with a nil or low hurdle, capturing only value above a set threshold) are commonly used to incentivise employees. If employees hold growth shares that represent less than 5% of the ordinary share capital, they will not ordinarily qualify for BADR on disposal.

EMI (Enterprise Management Incentive) options have their own relationship with BADR. Shares acquired on exercise of qualifying EMI options can qualify for BADR after only two years from the grant of the option (rather than two years from the acquisition of shares). This is a significant advantage — the two-year clock starts from grant, not exercise, allowing employees to qualify much earlier.

Investors' Relief: The External Investor Equivalent

Investors' Relief was introduced in 2016 for external investors in qualifying unquoted trading companies who are not officers or employees. It charges gains at 18% for 2026/27 (same rate trajectory as BADR: 10% to April 2025, 14% in 2025/26, 18% from April 2026), but with a separate £1m lifetime limit from BADR.

Key conditions:

• The investor must subscribe for newly issued ordinary shares (not existing shares);
• The shares must be held for at least three years (from April 2016);
• The investor must not be an employee or officer of the company at the time of subscription (or during any subsequent period of share ownership, in most cases);
• The company must be a qualifying trading company or holding company of a trading group.

This makes Investors' Relief useful for: angel investors, family members who have invested but are not working in the business, or founders who have left the business but retained their shares.

Combined planning: A founder who qualifies for BADR on £1m of gain, and has a spouse who has invested as an external investor, can potentially shelter £2m of gain at 18% (£1m each under separate lifetime limits).

Multiple Qualifying Events Across a Lifetime

Because the lifetime limit is per individual (not per business), BADR can be claimed across multiple disposals over a career. A serial entrepreneur who:

• Sells Business A at a £400,000 qualifying gain (claims £400,000 of BADR);
• Later sells shares in Business B at a £600,000 qualifying gain (claims remaining £600,000 of BADR);

...has fully used the £1m lifetime allowance and cannot claim further BADR on any future disposal.

Tracking the cumulative BADR claimed is therefore important, particularly for individuals who have made multiple disposals. The position should be reviewed before any new disposal.

Common BADR Pitfalls

• Investment activities: If a company has significant investment activities alongside trading, it may fail the "trading company" test. HMRC applies a "mainly trading" test.
• Personal service companies: Some personal service companies may not be qualifying trading companies.
• Shares not held for two years: Particularly common with shares acquired through EMI exercises or recent acquisitions.
• 5% test failed due to share buybacks or ratchets: Ratchet mechanisms, anti-dilution rights, or buybacks can affect the 5% calculation.
• Director fees classified as dividend: If a director receives returns primarily as dividends rather than salary, the "employee or officer" test should be confirmed — but dividends alone do not satisfy the employment condition.

Tax rules and HMRC practice in this area change. The above reflects legislation as of June 2026. Obtaining a personal tax opinion before a disposal is strongly advisable.

How Global Investments Can Help

For business owners approaching a sale or exit event, BADR planning can be one of the most valuable conversations to have — ideally well before the transaction, not on the day of signing. Global Investments works alongside specialist tax advisers and corporate lawyers to review qualifying conditions, model the CGT saving, and implement any protective elections well in advance. We also advise on post-sale wealth management: how to reinvest the proceeds tax-efficiently, whether through pension contributions, EIS, or other wrappers. Contact us to discuss your exit planning.