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When are you eligible for Business Asset Disposal Relief (BADR)?

Understanding what BADR is and when you’re eligible for it when selling all or part of your business.

Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs' Relief, is a beneficial tax relief that reduces the amount of Capital Gains Tax (CGT) you need to pay when you sell – or dispose of – qualifying assets. 

BADR is only available to business owners, sole traders, employees and office holders, so long as the conditions listed below are met. It doesn’t apply to shareholders or investors who aren’t employed by – or own – the company. 

All gains from BADR-qualifying assets are subject to just 10% CGT, so it’s worth understanding whether your shares qualify as the tax relief could make a huge difference to your net gain. 

The general rules for BADR

Both of the following must apply for at least 2 years up to the date you sell your shares:

  • You’re an employee or office holder of the company (or one in the same group of companies) 
  • The company’s main activities are in trading (rather than non-trading activities like investment) – or it’s the holding company of a trading group

If the shares are not EMI eligible (more on EMI below), you must meet the ‘personal company’ test for at least 2 years before you sell your shares. This means you have at least 5% of both the shares and voting rights. 

You must also be entitled to at least 5% of either

  • Profits that are available for distribution and assets on winding up the company
  • Disposal proceeds if the company is sold 

You’ll be able to find your ownership and voting percentage on your Vestd cap table. 

You can work out this information via the company’s waterfall or in the share class particulars. But generally speaking, if you hold more than 5% of the company’s ordinary shares, you will receive more than 5% of the proceeds if the company is sold. 

If your percentage ownership falls below the 5% ‘personal company’ threshold because of a new share issuance, you may still be able to claim BADR.

However, you’ll need to sell your shares on or before the new shares are issued to realise the capital gain. This gain will be subject to BADR rather than CGT so long as the other conditions are met. 

You can also choose – or ‘elect’ – to postpone paying tax on the gain by: 

  • Completing the additional information section of the Capital Gains summary form of your tax return
  • Writing to HMRC if you do not have to complete a tax return for the year

If the company stops being a trading company, you can still qualify for BADR if you sell your shares within 3 years.

Does EMI qualify for BADR? 

EMI-eligible shares qualify for BADR so long as the following conditions are met: 

  • The EMI option was granted to you over 2 years ago (you must hold the EMI option for at least 2 years before selling any shares to qualify) 
  • The shares were purchased after 5 April 2013 
  • You are employed by the granting company at the time of sale 

Learn more about EMI tax

It’s also worth mentioning that BADR doesn’t apply to unapproved options or CSOP

Do growth shares qualify for BADR? 

This is where things get a little bit more complicated. As growth shares come with a hurdle rate attached, working out whether they’re entitled to 5% of either profits on winding up or proceeds of an exit is tricky. 

For example, you may hold 10% of the company’s share capital and voting rights, which ticks the ‘personal company’ box. 

But depending on the growth of the company from your hurdle rate to the eventual sale price, you might not be entitled to 5% of the company’s capital. 

Plus, you must have >5% capital rights for at least 2 years to qualify for BADR. 

To put it simply, here’s an example: 

  • Acme Ltd. has 1,000 shares
  • 100 (10%) of which are your growth shares
  • The current share price is £1 and your hurdle is £1.20 

2 years later the company is valued at £3 per share = £3,000. You’re entitled to £1.80 per share = £180. 

£180 is >5% of £3,000 so you have now met the capital rights test. 

However, you have to satisfy this test for at least 2 years, so you will have to hold the growth shares for at least 2 years from the date your shareholding exceeded the >5% capital rights threshold. Then the gain would qualify for BADR. 

As you can see, the rules for BADR-eligible growth shares are simple, but in reality the calculations are much more complex. In any scenario, it's essential you review HMRC guidelines and consult with a tax professional to determine your exact eligibility. 

Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'