01

Who qualifies for BADR — the four conditions in full

BADR applies to gains from three types of disposal: (1) the sale of all or part of a trading business owned as a sole trader or in a partnership; (2) the sale of shares in a personal company that is a qualifying trading company; and (3) the disposal of assets used in a business that has ceased. For each, specific conditions must be met for a continuous period of two years ending on the date of disposal.

For shares in a personal company, the four conditions that must all be met throughout the two-year qualifying period: (a) the individual must own at least 5% of the ordinary share capital; (b) the individual must hold at least 5% of the voting rights; (c) the company must be a trading company or the holding company of a trading group (not an investment company); and (d) the individual must be an employee or officer of the company.

The two-year period is measured on a continuous basis — it cannot be aggregated from non-continuous periods. A founder who held 10% of shares for three years, was diluted to 4% by a funding round, and then sold 18 months later does not meet the 5% holding condition throughout the required two-year period immediately before disposal. BADR would not be available on the full gain — only potentially on the gain accrued before dilution, and only if a deemed disposal election was made at the time of dilution.

02

The lifetime limit — £1 million and how it is used

The BADR lifetime gains limit is £1 million per individual — a permanent reduction from the £10 million limit that applied before 11 March 2020. Once the limit is used, it cannot be refreshed or reset. Gains above the lifetime limit are taxed at the standard CGT rate (24% for higher rate taxpayers in 2026/27).

The lifetime limit is cumulative across all BADR claims made by an individual throughout their career. A business owner who claimed £400,000 of BADR on a first business sale in 2019 has £600,000 of lifetime limit remaining for future disposals. Any further BADR claims are limited to £600,000 of qualifying gains — the remaining £400,000 of a £1 million gain on a second business sale would be taxed at 24%.

For business owners with multiple qualifying assets — shares in different companies, or business assets alongside company shares — the lifetime limit must be allocated across all claims carefully. HMRC does not automatically allocate the limit in the most tax-efficient way — the taxpayer must specify which gains are to qualify for BADR on the self-assessment return.

For married couples who co-own a business: each partner has their own £1 million BADR lifetime limit. A 50/50 married couple each have £1 million of BADR available — total BADR-qualifying gains of £2 million between them, saving £120,000 in CGT at the 18% BADR rate versus 24% standard rate. Business structures that share ownership between spouses within the qualifying conditions can double the aggregate BADR benefit.

03

The 5% shareholding test — dilution, anti-dilution elections and the deemed disposal

The 5% ordinary share capital and 5% voting rights conditions are the most frequently breached BADR conditions — typically as a result of funding rounds that dilute existing shareholders below the threshold.

The deemed disposal election under s169I TCGA 1992 preserves BADR on gains accrued before dilution. If a founder holds 8% of shares with a base cost of £50,000 and market value of £800,000 at the time of a diluting funding round, they can elect to be treated as having disposed of and immediately reacquired the shares at market value (£800,000). This crystallises a notional gain of £750,000 — which qualifies for BADR if the conditions were met at the point of dilution. No actual tax is paid at this point (it is a notional disposal) — the gain is deferred until the actual disposal. But the BADR entitlement on the £750,000 gain is locked in, regardless of what happens to the shareholding percentage subsequently.

The election must be made on the self-assessment return for the tax year in which the diluting event occurs. It cannot be made retrospectively after the tax year. Founders who are diluted below 5% in 2025/26 must make the election on their 2025/26 self-assessment return (filed by 31 January 2027) or lose the BADR entitlement on accrued gains permanently.

AMNT (Minimum Nominal Value Test): the Finance Act 2019 introduced an additional condition requiring the shareholder to be entitled to at least 5% of the company's distributable profits and 5% of assets on a winding up. For companies with complex share structures — preference shares, ratchet arrangements, liquidation preferences — the 5% economic entitlement must be verified against the full capital structure, not just the legal share percentage.

04

The exchange date versus completion date — rate planning for transactions in progress

For CGT purposes, the date of disposal of shares is the date on which the contract becomes unconditional — typically the exchange date for a negotiated share sale, not the completion date. This distinction is critical for rate planning when CGT rates change.

If the BADR rate changes on 6 April 2027 (hypothetically), a transaction where exchange occurs on 4 April 2027 but completion occurs on 30 April 2027: the disposal date is 4 April 2027 (pre-rate change). The pre-change rate applies to the entire gain, regardless of when completion occurs and consideration is received.

For business owners in an active sale process in late 2026 or early 2027, the exchange date should be deliberately targeted to capture the most favourable rate. Legal advisers and tax advisers should be briefed on the tax year boundary and the implications for exchange timing. The commercial pressure to complete quickly must be balanced against the tax saving from a carefully timed exchange.

For earn-out arrangements (where consideration is payable over multiple years based on future performance), the disposal date is still the original exchange date — but the earn-out consideration is valued at its estimated present value on exchange, with adjustments as actual payments are received. Earn-outs create complex CGT timing issues that require specialist advice.

05

Investors' relief — the higher limit for external investors

Investors' relief (IR) is a separate BADR-equivalent relief for external investors in qualifying unlisted trading companies. The key differences: IR has a £10 million lifetime limit per individual (versus BADR's £1 million); IR requires the investor not to be an employee or officer of the company; and IR requires the shares to be newly issued (subscribed for, not acquired from an existing shareholder) and held for at least three continuous years.

The IR rate follows BADR: 10% before April 2025, 14% from April 2025, 18% from April 2026. The same rate structure applies — the primary advantage of IR over BADR is the £10 million lifetime limit, which makes IR significantly more valuable for large investments in single companies.

For high net worth individuals who invest in unlisted trading companies as business angels or family office investors, IR is one of the most valuable CGT reliefs available. A £5 million investment that grows to £15 million over seven years: gain of £10 million, IR rate 18% = £1.8 million CGT. Without IR: standard rate 24% = £2.4 million CGT. IR saving: £600,000 on a single investment.

IR interacts with SEIS and EIS. SEIS provides 50% income tax relief and CGT exemption on gains reinvested. EIS provides 30% income tax relief, CGT deferral and CGT exemption after three years. For investments that qualify for SEIS or EIS, those reliefs are more valuable than IR — but IR can apply to investments that do not meet SEIS/EIS criteria (for example, companies that are too large or in excluded sectors).