Claiming Business Asset Disposal Relief on share disposals

The devil is in the detail when claiming Business Asset Disposal Relief on share disposals. This article discusses the conditions that need to be fulfilled and those pitfalls to avoid. 

Claiming business asset disposal relief on share disposals


Entrepreneurs' Relief (ER) was renamed Business Asset Disposal Relief (BADR) by Finance Act 2020.  So, BADR is a Capital Gains Tax (CGT) relief reducing the tax rate to 10% on the disposal of business assets. Additionally, this relief is capped at a lifetime limit of £1 million worth of capital gains. Therefore it is a significant consideration for business owners and shareholders contemplating a sale.

Additionally, it applies to disposals of a sole trade and its assets, partnership interests and assets. Also it can be claimed on your company shares, joint ventures and business assets held by a trust. 

 Although this time, we focus on the rules applying to the disposal of shares in your own company.

Qualifying conditions generally

Understanding the qualifying conditions for BADR is vital if you're claiming Business Asset Disposal Relief on share disposals . Therefore meeting these conditions determines whether BADR is applicable. What's more, BADR applies to capital gains made on the disposal of company shares or securities when either of the two conditions A or B apply.

Condition A:

Throughout the period of two years prior to the disposal, the company is either a trading company or a member of a trading group

For two years prior to the disposal, the individual owns:

  • At least 5% of the company’s ordinary share capital and
  • Plus At least 5% of voting rights by virtue of that shareholding and
  • Also Is entitled to 5% of the distributable profits available to equity holders and
  • Is entitled to 5% of the rights to assets (for equity holders) in a winding up or
  • Has an entitlement to at least 5% of the sales proceeds on the disposal of the ordinary share capital of the company.

Condition B:

Within three years immediately before the disposal, the company ceased to be either a trading company or a trading group, and Condition A applied throughout the two years before that cessation.

There is no requirement for the company to be UK based. Therefore share disposals in overseas companies by UK resident shareholders qualify provided the conditions are met.


So, to provide some further context:

  • Long-term Investor: David has held a 10% stake in Brent Enterprises Ltd, a trading company, for three years. Also he has been an active director during this period. Therefore, his share sale would likely qualify for BADR.
  • Recent Shareholder: Andy acquired a 6% stake in When the whistle blows Ltd, a trading company 18 months ago. He is also an employee. However, despite meeting the shareholding and employment criteria, he doesn't qualify for BADR. This is because he hasn't held the shares for the required two-year period.
  • Minority Shareholder: Tony owns 3% of Tambury Gazette Ltd and has been a director for five years. Although he meets the duration and position criteria, his shareholding percentage disqualifies him from BADR.

Qualifying shares

Trading or investment company shares?

BADR is aimed at trading companies actively engaged in commercial activities. Therefore, the company must be a trading company or the holding company of a trading group for shares to qualify. 

However shares in investment companies, for example primarily holding rental properties or other company shares, do not qualify for BADR. Moreover, the distinction lies in the company's main activities. What's more HMRC have detailed the circumstances where they consider a company is considered an investment company.

Definition of ordinary share capital

The definition for BADR purposes is “all the company’s issued share capital (however described), other than capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company’s profits”.

Care must be taken when assessing whether you hold 5% of assets available for distribution on a winding-up. Because if there are loans that are not normal commercial loans; shares that appear to qualify for relief may not. What's more, there is currently no guidance from HMRC on this point.

Equally importantly, check your shares if they have unusual or bespoke rights attached to them.  Additionally, where you are disposing of shares in a non-UK company you need confirmation that the company has share capital. Moreover it can be an issue with some overseas entities the UK views as transparent. This is because they are viewed as companies locally.

Potential issues with claiming BADR

We cover below some potential issues that need to be considered when claiming Business Asset Disposal Relief on share disposals.

Dilution of shareholding after commercial fundraising

Your shareholding could become diluted below the 5% threshold after a commercial fundraising. As a result, a future sale would not qualify for BADR. Therefore,  you can elect to treat your shares as disposed of and immediately reacquired at market value (a notional disposal) and claim BADR.

However a condition of the election is that you cease to hold shares in a personal company. In other words, your stake falls below 5% as a result of a cash raising share issue for commercial purposes .Also the purpose of this share issue was not to obtain a tax advantage.

Furthermore, your shareholding must meet all the qualifying conditions for BADR had you disposed of your shares immediately before the fundraising.

Additionally, you can elect to defer the capital gain on the deemed disposal. Therefore this will crystallise on a future disposal. Where only part of the shareholding is disposed of, that proportion of the deferred gain will crystallise.

Trading company and trading group

In order to qualify a company must predominantly be carrying on trading activities that do not include substantial non-trading activities. extent. This means in practice no more than 20% of a company's activities should be of a non-trading nature. 

Moreover a company’s trading status is considered by reviewing all its activities 'in the round'. Therefore, Investment businesses, like property rental businesses are unlikely to meet HMRC's conditions. 

A company or business is not regarded as trading if it has substantial non-trading activities with the following considerations:

  • Income from non-trading activities
  • The asset base of the company.
  • Expenses incurred or time spent by officers and employees of the company in undertaking its activities.
  • The company’s history.
  • The balance of all the above considered 'in the round'.

Equally importantly, these activities are viewed in terms of what the company is doing rather than based on time spent by the employees. This was evidenced in this well known tax case here

Surplus Cash and your company's trading status

A surplus of cash on the company's balance sheet may not in isolation remove company trading status. However, large surplus cash balances combined with substantial investment activities following a cessation of trade could cause issues.  Because this may indicate that the company has become non trading. Shares in such companies do not qualify as business assets for BADR.

However a company may have a temporarily large cash balance, perhaps due to a property sole. It could be waiting to reinvest in another trade-related property. However, just because it temporarily affects its trade-to-investment ratios, does not mean it has ceased to become a trading company. 

This is different to a company that has been building up cash over the years who is then using this cash as an investment asset.

Therefore, if your company has a large cash balance post business or trade disposal and prior to liquidation, BADR should apply for the return of capital to shareholders. This is provided that conditions A or B (referred to above) are met. Additionally the company must be wound up and distributions made within three years following trade disposal. 

What's more, HMRC operate a clearance service which companies can use in order to determine trading status, this may be useful for cash-rich companies.

Inadequate record keeping

Maintaining detailed records of share ownership, roles within the company, and the nature of the company's activities is crucial. Because inadequate record-keeping can lead to challenges in proving eligibility for BADR.

Officers and employees

There is no requirement that an employee should work full-time. Additionally, an officer can include a company secretary and a non-executive director. Therefore, where an officer or employee is leaving they should remain in post until the day of the share disposal and not resign, for example, a day earlier. 

Multiple shareholders or employee share schemes

One of the many advantages for Enterprise Management Incentive (EMI) option shareholders is they qualify for BADR. What's more, this is regardless of the size of their shareholding provided they hold their options for 24 months.

This is not the case for participants of non-EMI company share schemes.  They may start with 5% of a company though  due to further allotments to new shareholders see their shareholding diluted to below 5%. Additionally, this can apply as a result of share reorganisations.

Failure to seek professional advice

Incorrectly claiming BADR can result in significant tax liabilities and potential legal challenges. Therefore, it's essential to have a thorough understanding of the rules and or seek professional advice.

In one tax case an individual failed to declare the gains on the sale of the shares in his company. As a result, they suffered penalties for an incorrect return. What's more, he had failed to take proper advice. Because once he had confirmed that BADR applied he did not want to pay further advisers fees. As a result, this was a costly mistake as the penalties imposed were in excess of £95,000.


Whilst BADR offers substantial benefits for share sales, it's surrounded by complexities that require very careful consideration.

For more useful information, check out our Ebooks here.

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