What is Business Asset Disposal Relief (BADR)? Guide for directors

Business Asset Disposal Relief (BADR) can reduce the amount of Capital Gains Tax you pay when you sell or close a business.

For limited company directors, the relief is particularly relevant when you sell shares in your company or close it down and take the remaining funds as capital.

Here, our simple guide summarises the elements of Business Asset Disposal Relief that are likely to be relevant to contractors, consultants and freelancers working through their own limited companies.

Previously known as Entrepreneurs’ Relief (prior to 6 April 2020), Business Asset Disposal Relief applies a lower rate of Capital Gains Tax to qualifying gains when businesses, shares and certain other business assets are disposed of.

The BADR rate is 18% for qualifying disposals made on or after 6 April 2026. This increased from 14% in 2025/26 and 10% before 6 April 2025.

You can read the current rates and eligibility rules in the HMRC guidance on Business Asset Disposal Relief.

Who can benefit from Business Asset Disposal Relief?

BADR covers several different types of business disposal.

If you’re a sole trader or business partner selling all or part of your business, you must normally have owned the business for at least two years before the sale.

The relief also applies to qualifying disposals of shares in a limited company. This is likely to be more relevant if you’re a contractor or consultant trading through your own company.

BADR can also apply when a business stops trading, provided the relevant conditions are met.

There are separate rules covering other situations, including shares acquired through an Enterprise Management Incentive (EMI) scheme.

BADR conditions for limited company directors

If you’re selling shares in your limited company, there are several conditions you need to meet.

For at least two years before you dispose of the shares:

• The company must be a trading company, or the holding company of a trading group.
• You must be an employee or officer of the company. A director counts as an officer.
• You must normally own at least 5% of the company’s ordinary share capital.
• Your shares must give you at least 5% of the voting rights.
• You must also meet the 5% economic interest test.

The economic interest requirement means you’re entitled to at least 5% of the company’s distributable profits and assets on a winding up, or at least 5% of the proceeds if the whole company is sold.

For a typical contractor company with one director/shareholder who owns 100% of the ordinary shares, the 5% tests are unlikely to pose a problem.

They become more important where a company has several shareholders or different classes of shares.

HMRC provides more detail on the conditions for claiming Business Asset Disposal Relief.

What does ‘trading company’ mean?

Your company must be a trading company for BADR purposes, rather than one primarily engaged in investment activities.

For most contractors and consultants actively providing services to clients, this distinction is fairly straightforward.

Problems can arise when a company has made substantial investments or carries on significant activities that aren’t part of its trade.

If you’ve accumulated a large amount of cash or investments within the company and you’re considering selling or closing it, discuss BADR with your accountant before proceeding.

What happens if your company stops trading?

You don’t necessarily lose BADR as soon as your company stops trading.

If the company ceases to be a trading company, you can still qualify for relief on a later disposal of your shares, provided the relevant conditions were met before trading stopped and you dispose of the shares within three years.

The two-year qualifying period still matters, so closing a newly formed company after only a short period of trading won’t normally qualify.

How much tax do you pay with BADR?

From 6 April 2026, qualifying gains are charged to Capital Gains Tax at 18%.

This compares with the main CGT rate of 24%, which applies to many gains that don’t qualify for BADR.

For example, if you make a qualifying taxable gain of £100,000, the BADR rate would produce a CGT bill of £18,000 before taking account of any available allowances or other relevant gains and losses.

Without BADR, the same gain charged entirely at the 24% main rate would result in £24,000 of CGT.

The tax saving in this simplified example is therefore £6,000.

The £1 million lifetime limit

There’s a lifetime limit on the amount of gains which can benefit from BADR.

The current limit is £1 million per individual.

This isn’t a £1 million allowance. It means up to £1 million of qualifying gains over your lifetime can be subject to the BADR rate.

You can make more than one BADR claim, but previous claims count towards the limit.

For example, if you had previously claimed BADR on a £300,000 qualifying gain, you would have £700,000 of your lifetime limit remaining.

The lifetime limit has changed considerably over the years, so previous claims for Entrepreneurs’ Relief can affect how much BADR you have left.

Winding up a limited company

BADR often comes into play when a contractor or consultant decides to close a solvent limited company with money left in it.

A company with distributable reserves of £25,000 or less can generally distribute those funds as capital when the company is struck off, subject to the relevant conditions.

Where distributions exceed £25,000, they will normally be treated as income rather than capital if you simply strike the company off.

For companies with substantial retained funds, a Members’ Voluntary Liquidation (MVL) is therefore often used. An MVL is a formal liquidation of a solvent company carried out by a licensed insolvency practitioner.

Money distributed to shareholders through an MVL is normally treated as capital rather than dividend income. If you meet the BADR conditions, the qualifying gain can then benefit from the 18% BADR rate.

You can find out more in our guide to closing a limited company.

Watch out for the anti-phoenix rules

There are additional rules to consider if you close your company, take the retained profits as capital and then start carrying on the same or a similar business again.

These are often called the anti-phoenix rules.

They are designed to prevent someone repeatedly building up profits inside a company, liquidating it to obtain capital tax treatment, and then starting another company to continue essentially the same business.

The rules can apply where you receive a distribution from a winding up and, within two years, continue or become involved in the same or a similar trade or activity, subject to other conditions.

If the rules apply, money you expected to be taxed as capital can instead be treated as income.

This is particularly important for contractors who are considering an MVL but expect to continue contracting through another company afterwards.

If that’s what you’re planning to do, speak to your accountant before starting the liquidation.

How do you claim Business Asset Disposal Relief?

BADR isn’t applied automatically.

You normally claim the relief through your Self Assessment tax return. HMRC also provides a Business Asset Disposal Relief helpsheet which can be used to make a claim.

There are deadlines for claiming, based on the tax year in which you sold the business, disposed of the shares or closed the business.

You can find the current deadlines and claim information in HMRC’s BADR guidance.

Speak to Integro before closing your company

If you’re planning to sell or close your limited company, it’s worth checking whether you meet the BADR conditions before you start the process.

The timing of the disposal, your shareholding, the company’s trading history and what you plan to do afterwards can all affect the tax treatment.

If you’re an Integro Accounting client, your accountant can guide you through the process and, where an MVL is required, introduce you to a licensed insolvency practitioner who can complete the liquidation for you.