Do shares qualify for Business Asset Disposal Relief?

Last updated: 1 November 2024. 

BADR, short for Business Asset Disposal Relief (try saying that three times fast!) is a type of tax benefit. It’s designed to mitigate Capital Gains Tax (CGT) liabilities when disposing of qualifying assets.

Formerly known as Entrepreneurs' Relief, BADR comes with strict eligibility criteria and has a symbiotic relationship with employee share schemes such as Enterprise Management Incentives (EMI).

Sounds interesting, but not sure what it all means in practice? Let’s find out.

What is the rate?

Some assets are tax-free, others aren't. When you sell or 'dispose of' a taxable asset that has increased in value, you'll generally pay 20% CGT on any gains you make. But with BADR that's reduced to 10%.

However, these rates are set to change following the Chancellor's recent announcement. As laid out in the Autumn Budget 2024, CGT will increase to 24%, and BADR will increase to 14% in April 2025 and 18% in April 2026. 

Eligibility for Business Asset Disposal Relief

It goes without saying, but you’ll need to understand the eligibility requirements before you can tap into the benefits of this tax relief mechanism.

This isn’t as clear-cut as you may think, as navigating what does and doesn’t constitute eligible can be a fairly complex business.

Firstly, you’ll need to have been an employee, office holder, or business owner for a minimum of two years leading up to the asset's sale.

Additionally, the company must predominantly engage in trading activities rather than non-trading pursuits (for example, investment). This specific requirement ensures BADR benefits are only available to businesses actively contributing to economic growth.

In cases where shares are not eligible under EMI, individuals must maintain the "personal company" status for a minimum of two years preceding the share sale.

This stipulation ensures that only individuals who are committed to the company, and involved in its affairs, may access BADR benefits.

Furthermore, individuals must satisfy the "personal company" test:

That means ownership of at least 5% of the company's shares and voting rights, along with entitlement to 5% of either distributable profits or disposal proceeds.

These thresholds are considered proof of an individual's substantial involvement and stake in the company's operations, aligning with BADR’s goal of incentivising entrepreneurship and business ownership. 

EMI and Business Asset Disposal Relief

There is an interplay between EMI and BADR to keep in mind. EMI-eligible shares can qualify for BADR provided certain conditions are met.

These conditions include:

• Holding EMI options for over two years before selling shares
• Purchasing shares after April 5, 2013, and
• Maintaining employment with the granting company at the time of sale.

By aligning with EMI's eligibility criteria, employees can unlock BADR benefits, thereby enhancing the overall attractiveness of share schemes as a means of incentivising and retaining talent within organisations.

In case you’re wondering, BADR does not extend to unapproved options or Company Share Option Plans (CSOPs).

Growth shares and BADR

While meeting the "personal company" requirement may seem straightforward, calculating entitlement to profits or disposal proceeds can be a much more complicated matter.

Growth shares, characterised by hurdle rates, introduce additional layers of complexity, requiring careful consideration and analysis to ascertain eligibility for BADR. 

You could potentially qualify for BADR on the disposal of your growth shares but it really depends on the situation.

This is one of the instances where it’s worth turning to experts (unless you’re an expert yourself, of course!). 

If this is not your bread and butter, talk to a tax professional, so you can effectively navigate this intricate landscape without any nasty surprises. And, speaking of surprises…

What does the future hold?

Is change in the air for BADR? If so, it wouldn’t be the first time.

Over the years, BADR has undergone numerous revisions, including the transition from Entrepreneurs' Relief. Speculation looms over potential future alterations, particularly under evolving governmental policies.

Future governments may contemplate modifying the relief's eligibility criteria, adjusting tax rates, or even phasing out the relief altogether in response to a changing economic landscape and differing fiscal priorities.

So for now, all we can say is - watch this space.

Did you know?

UK companies can set up and manage EMI option schemes or growth share schemes on Vestd.

Scheme members can see what their shares/options are worth and exercise their options through the platform too, via their dashboard.

Learn more