Business Asset Disposal Relief: How It Works in 2026/27

For a business owner selling up after years of building value, the difference between qualifying for Business Asset Disposal Relief and not qualifying can run to tens of thousands of pounds in additional Capital Gains Tax (CGT).

Sadly, the relief has become less generous over time. The rate has risen from 10% to 18%, and the lifetime limit was cut from £10 million to £1 million back in 2020. However, for those who qualify, it still offers a meaningful saving over standard CGT rates. This article covers the current rules in full, the most common reasons claims fail, and what good pre-transaction planning looks like for 2026/27.

What Is Business Asset Disposal Relief?

Previously called Entrepreneurs’ Relief until it was renamed in April 2020, BADR reduces the rate of Capital Gains Tax on qualifying gains from the disposal of certain business assets. It’s available to individuals — not companies or discretionary trusts — and, in specific circumstances, to trustees of some settlements.

The current rate for 2026/27 is 18% on qualifying gains up to a £1 million lifetime limit.

Without BADR, gains above the basic rate band are taxed at 24%, so the relief saves 6 percentage points per pound of qualifying gain — a maximum saving of £60,000 on a full £1 million qualifying gain. That £1 million limit is cumulative across every qualifying disposal you ever make, not an annual allowance and not a per-transaction one.

Have you kept track of how much of yours you’ve already used?

Business Asset Disposal Relief Rates: How the Relief Has Changed

Anyone who planned a sale around an assumed 10% rate needs to revisit their net proceeds assumptions. At 18%, the saving over standard rates has narrowed materially compared with a few years ago.

That being said, at up to £60,000 on a full £1 million qualifying gain, it remains well worth pursuing for those who qualify.

Who Qualifies for BADR?

The following scenarios outline when and who qualifies for BADR:

Selling a sole trade or partnership interest:

To qualify under this scenario, a business must have been owned for at least two years ending on the date of disposal, and the disposal must represent the whole business, or a part capable of being carried on independently.

Relief applies to business assets actually used in the business, not to investment assets held within the same entity. Property rental businesses generally don’t qualify, though property development and land dealing may do.

Selling shares in a personal company:

To be eligible for this scenario, throughout the two-year qualifying period ending with disposal, the shareholder must:

• be an employee or director of the company (there’s no minimum hours requirement),
• hold at least 5% of the ordinary share capital and voting rights (the “personal company” test),
• meet one of the economic entitlement tests: either 5% of distributable profits and 5% of assets on a winding up, or 5% of proceeds on a sale of the entire ordinary share capital.

The company must also be a trading company, or the holding company of a trading group, meaning investment activity mustn’t be “substantial.” HMRC’s long-standing rule of thumb here is broadly 20%, by reference to turnover, assets, management time, or expenditure — though recent case law has made this area somewhat less settled than it once was, which is exactly the kind of nuance worth getting a second opinion on.

Selling assets after a business ceases

For this scenario to be a workable option, a business must have been owned for at least two years before it ceased, the asset sold within three years of cessation and the asset only needs to have been in use at the point the business stopped — not throughout the full two-year period.

Associated Disposals

An associated disposal lets BADR apply to assets you own personally but that are used in the business — a property the company trades from, for example — when sold as part of an overall withdrawal from the business.

The asset needs to have been used in the business for at least two years and owned by you for at least three years before disposal. Relief may be restricted if rent was charged for use of the asset, or if it wasn’t in business use for the whole period of ownership.

Sole traders can’t claim under this specific category, though the “assets after cessation” rules above may still apply to them.

BADR and EMI Shares

Shares acquired through Enterprise Management Incentive (EMI) options benefit from a genuinely useful exception: BADR is available even where the personal company tests — the 5% shareholding requirement — aren’t met, provided the option was granted at least two years before disposal.

This means “exit-only” EMI options, exercised immediately before a company sale, can still qualify for BADR, as long as the option itself has been held for the full two years. For founders and senior employees holding meaningful EMI stakes in high-growth companies, this is a genuine planning opportunity worth flagging early with an adviser.

Where BADR Claims Commonly Go Wrong

Given the savings available, it’s important to be aware of what may prevent BADR claims going through. Common issues are:

Share dilution below 5%:

A funding round or new share issue can inadvertently push a founder’s holding below the 5% threshold, breaking the personal company test. A dilution election can preserve the BADR-qualifying gain accrued up to that point — but only if made at the right time; it can’t be made retrospectively once a sale has happened.

The trading company test

Businesses with significant property investments, holding structures with inactive subsidiaries, or a split between trading and non-trading activity can fail this test. As above, recent case law has made HMRC’s historical rule of thumb less certain than it once was.

Not being an employee or officer

A director who steps back into a purely advisory role, or a shareholder who resigns their directorship to reduce involvement, may cease to count as an “employee or officer.” Part-time and non-executive roles do count, but formally stepping down before the two-year qualifying period ends can break eligibility altogether. If you’ve recently changed your role in your own business, is this something worth checking?

Goodwill on incorporation

Gains on goodwill when transferring a business into a close company in which the seller and connected persons hold 5%+ don’t qualify for BADR — a point that catches out many incorporation transactions if the business is then sold shortly afterwards.

Earlier claims reducing the lifetime limit

Because the £1 million limit is cumulative, an earlier BADR claim reduces what remains for future disposals. This is easy to overlook when the earlier claim was made years ago and isn’t front of mind — a seller planning a £1 million disposal today might find only £400,000 of headroom left.

Associated disposal restrictions for rent paid

Where rent was charged by the business for use of a personally-owned asset during the qualifying period, the gain eligible for BADR on that associated disposal is restricted proportionally.

How the Saving Is Calculated

There are a number of ways BADR can be calculated:

• Single shareholder, full lifetime limit available: a director sells a 30% shareholding in a trading company, meeting all qualifying conditions, realising a gain of £800,000. With BADR, CGT is £144,000 (18%); without it, £192,000 (24%) — a saving of £48,000.
• Two shareholders planning a joint exit: two co-founders each hold 50% and each realise a £600,000 gain. Both qualify for BADR with their full lifetime limit intact, since each individual has their own separate £1 million limit. Each pays £108,000 in CGT rather than £144,000 — a saving of £36,000 each, £72,000 combined.
• Partial lifetime limit remaining: an owner claimed BADR on an earlier disposal in 2021, using £350,000 of their limit. On a later £900,000 qualifying gain, only £650,000 now qualifies for the 18% rate; the remaining £250,000 is taxed at 24%. Total CGT: £177,000, against £216,000 if no BADR were available at all.

When to Start Planning

Because eligibility depends on a two-year qualifying period, changes to shareholding, director status, or the company’s trading activities made within that window can break eligibility — and remedial action, once heads of terms have been agreed, is often too late. A BADR review is most valuable 12–24 months before a planned exit, not once the legal process is under way.

There are a number of factors, therefore, worth checking well ahead of any transaction:

• your current shareholding percentages and economic entitlement tests
• director or employee status for everyone intending to claim
• whether the company’s non-trading activities risk breaching the trading test
• any earlier BADR claims and how much lifetime limit remains; whether any EMI options have been held for the required two years
• how rent or use restrictions might affect any planned associated disposals.

HMRC doesn’t offer a pre-transaction clearance mechanism for BADR — eligibility can’t be formally confirmed in advance, which makes an independent professional review all the more valuable.

How to Claim BADR

BADR isn’t automatic; it has to be claimed, either through your Self Assessment return for the year of disposal or via a separate written claim to HMRC.

For 2026/27 disposals, the claim deadline is 31 January 2029; for 2025/26 disposals, it’s 31 January 2028 — in both cases, the first anniversary of the 31 January following the end of the relevant tax year.

Claims can be amended or revoked within the same time limit, and for trustees, the claim must be made jointly with the qualifying beneficiary. It’s worth keeping clear records of any previous BADR claims, since the cumulative lifetime limit means your claim history directly shapes what’s available to you next.

In Summary

BADR remains a valuable relief for qualifying business owners in 2026/27, applying an 18% CGT rate to gains up to a £1 million lifetime limit — a potential saving of up to £60,000 against standard CGT rates.

But the rules are specific, the eligibility tests can catch out even well-prepared owners, and the two-year qualifying period means timing matters just as much as the rules themselves. The single most useful thing a business owner approaching a potential sale can do is review their BADR position early, before deal timelines start narrowing the options.

If you’d like help reviewing your own BADR position, or understanding how it fits into your wider exit and financial plan, get in touch with First Wealth — we’d be glad to talk it through with you.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.