Sarah Bradford explains the changes to business asset disposal relief and why timing matters.
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Business asset disposal relief (BADR) reduces the rate of capital gains tax (CGT) payable on a qualifying disposal of business assets. The relief (which was formerly known as entrepreneurs’ relief) is available to individuals and some trustees when they dispose of all or part of their business, their business assets or shares in their personal company.
Currently, the relief reduces the rate of CGT on qualifying disposals within the lifetime £1m limit to a very attractive 10%. However, there remains only a small window of opportunity to benefit from this rate. As announced by Rachel Reeves in her first Budget on 30 October 2024, the rate of CGT on assets qualifying for BADR is to rise to 14% from 6 April 2025 and to 18% from 6 April 2026.
Individuals looking to dispose of their business in the near future may wish to reconsider the timing to ensure that they are able to benefit from the best possible rate of BADR. However, before making a disposal, they must check that the necessary qualifying conditions have been met throughout the qualifying period.
Nature of the relief
The relief applies to reduce the rate of CGT payable on disposals of qualifying assets. The relief is subject to a lifetime limit of £1m. However, spouses and civil partners each have their own £1m limit, so by making use of the ability to transfer assets between spouses and civil partners at a value that gives rise to neither a gain nor a loss, it is possible for a couple to benefit from the favourable capital gains rate on gains of up to £2m.
However, each individual must meet the qualifying conditions for the necessary two-year period to access the relief.
Qualifying conditions
The availability of BADR is contingent on the qualifying conditions being met throughout the requisite two-year period. The precise conditions depend on the nature of the disposal.
BADR is only available on the disposal of business assets where there is a disposal of all or part of the business; relief is not available for disposals of business assets by a continuing business. To qualify, the business must be owned by the individual, either directly or by a partnership in which the individual is a member, for a period of at least two years up to the date on which the business is sold or otherwise disposed of.
Relief is also available where a business is closed, as long as it was owned by the individual or a partnership in which the individual was a member for at least two years up to the date of cessation. The qualifying business assets must be disposed of within three years of the date on which the business ceased to benefit from BADR.
The relief may also be available on the disposal of an asset owned by the individual personally and used by the business or partnership if the disposal is an associated disposal.
An individual may also be able to benefit from BADR, where they dispose of shares in or securities of their personal company. However, again there are conditions to satisfy. The company must be a trading company or the holding company of a trading group. It must also be the individual’s personal company, which will be the case if they hold at least 5% of the ordinary share capital, and this gives them at least 5% of the voting rights, entitles them to at least 5% of the profits available for distribution and at least 5% of the distributable profits in a winding-up. The individual must also be entitled to at least 5% of the proceeds in the event of a company sale.
These conditions must be met for the two-year qualifying period, which normally runs to the date on which the shares are sold. However, although relief may still be available if the company ceases to be a trading company or a member of a trading group in the three-year period prior to the date on which the shares are sold, in this situation, the two-year qualifying period runs to the date on which the company ceased to be a trading company or a member of a trading group.
Landlords selling a furnished holiday letting are able to access BADR if they cease the furnished holiday lettings business on or before 5 April 2025 and dispose of the property within three years of cessation, assuming the qualifying conditions have been met.
Qualifying assets
The relief is only available on the disposal of qualifying assets. The following count:
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Assets, with the exception of goodwill in certain cases, used in the business. Business premises count as qualifying business assets; however, shares, securities and other assets held as investments do not count.
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Assets that were used in the client’s business or a partnership in which the client was a partner.
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Assets comprising shares in or securities of the client’s personal company.
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Assets owned by the client personally but used by a business carried on either by a partnership in which the client is a partner or by the client’s personal trading company or, where the client’s personal company is a holding company, by a trading company in that group. The disposal will only qualify for BADR if it is associated with a qualifying disposal of the partnership of the shares or securities in the client’s personal company.
It is important to note that where the disposal of the business is to a close company in which the individual (or a relevant connected person) owns at least 5% of the ordinary share capital, BADR will not apply to any gain on goodwill. However, in certain cases, this rule does not apply if the shares are sold within 28 days.
Timing
To minimise the CGT payable on a disposal of business assets, timing is everything.
The best rate of 10% applies to disposals made in the current tax year (i.e., on or before 6 April 2025). Where a disposal is in process, accelerating the disposal date so that it falls within 2024/25 is only beneficial if the qualifying conditions have been met for the two-year qualifying period on the new disposal date. If the conditions have been met for less than two years, BADR will not be available, and gains will be taxed at the standard CGT rates, which since 30 October 2024 is 18% where income and gains fall within the basic rate band, and 24% thereafter. Consequently, it is better to wait until the conditions have been met for two years so that BADR will be available. Where the disposal takes place in 2025/26, qualifying gains will be taxed at 14%. If the disposal does not take place until 2026/27 or later, gains will be taxed at 18%.
Prior to 30 October 2024, the rate of BADR was aligned with the CGT rate applying to basic rate taxpayers – both being set at 10%. From 30 October 2024, the CGT rate for basic rate taxpayers was increased to 18%, with the rate applying to BADR gains remaining at 10% for the remainder of the 2024/25 tax year. Accessing BADR in this period is a very good deal, allowing an individual to save tax of up to £140,000 where the gains would otherwise be taxed at the higher CGT rate of 24% if BADR was not available. Basic-rate taxpayers, too, can benefit from savings by claiming BADR, where gains fall within the basic-rate band.
For 2025/26, the rate of BADR is 14%, but this is still below the CGT rate for basic rate taxpayers of 18%. A rate of 14% provides savings of up to £100,000, where the gains would be taxed at the higher rate of 24% in the absence of BADR. Basic rate taxpayers also save 4% on qualifying gains.
From 6 April 2026, the rate of tax for BADR gains is once again aligned with the CGT rate for basic rate taxpayers, both being set at 18%. Accessing BADR will save up to £60,000, where the gains would otherwise be taxed at the higher rate of 24%; however, there are no savings where the gains fall in the basic rate band.
Practical tip
As long as the qualifying conditions have been met for the two-year qualifying period, consider bringing forward a disposal of qualifying business assets to secure the best rate of BADR and minimise the CGT payable on the disposal.
