BADR (Business Asset Disposal Relief) for company directors

If you are closing down your limited company — due to retirement, a career change, or the impact of the Off-Payroll rules — you may be able to reduce the tax you pay on the funds you extract. This is where Business Asset Disposal Relief (BADR) comes in.

BADR can apply whether you close the company via a simple voluntary strike-off (where distributions are below £25,000) or through a formal Members’ Voluntary Liquidation (MVL) if reserves are higher.

In both cases, qualifying funds are treated as capital rather than income.

BADR lets qualifying business owners pay capital gains tax at a reduced rate, currently 14% from April 2025 (rising to 18% from April 2026), instead of the higher standard rates.

This can significantly increase the proportion of your company’s funds you can keep after tax.

In this guide, we explain the eligibility rules, how BADR works in practice, and how to claim it.

What is business asset disposal relief?

Business asset disposal relief applies capital gains tax at a discounted rate on profits of up to £1 million if you close down or sell your business. This is significantly lower than the capital gains tax rates you’d pay otherwise.

Until 6 April 2020, business asset disposal relief was known as entrepreneurs’ relief. The government renamed it and reduced the lifetime limit from £10 million to £1 million, but the core concept and eligibility criteria remained the same.

BADR rates and allowances

The BADR rate was 10% before April 2025. The rate is 14% for disposals from April 2025 and is scheduled to increase to 18% from April 2026.

The Annual Exempt Amount for capital gains tax is £3,000 for 2025/26.

The BADR lifetime cap remains £1 million of qualifying gains.

Who is eligible for business asset disposal relief?

The eligibility criteria for business asset disposal relief are different depending on what you’re disposing of:

• If you’re closing or selling all or part of your business:
  • You must have owned it, or been part-owner, for at least two years.
  • If you’re closing down the business, you must also sell all your business assets within three years.
• If you’re selling shares in a company you’ve invested in:
  • The company must be a trading company. This means that non-trading activities, such as investments, do not make up more than around 20% of its activities.
  • You must own at least 5% of the company’s shares and voting rights.
  • You must have owned the shares for at least two years to be eligible for business asset disposal relief.
  • You must be entitled to at least 5% of the profits if the company is sold or dissolved.
  • You must have been an employee or office holder of the company for at least two years.

In practice, most contractors who trade through their own limited company qualify for business asset disposal relief. This is because you’re your company’s sole director and employee. Even if you’re partnered with someone else, you probably have more than the requisite 5% of shares and voting rights.

If you’re one of the rare IT contractors who work as sole traders or are in a partnership, you also qualify for business asset disposal relief, provided you’ve been a sole trader or a partner for at least two years before selling your business.

For obvious reasons, you won’t qualify for business asset disposal relief if you work through an umbrella company. This is because no umbrella company gives you an ownership stake. You’re just an employee.

How BADR works in practice

For example, let’s say you’ve decided to close your contracting business and call it a day. After settling your pre-tax liabilities, the company has retained profits of £150,000 in its business bank account.

As with income tax, there’s a yearly tax-free capital gains tax threshold called the annual exempt amount. This is currently a miserly £3,000 per year (2025/26).

Without business asset disposal relief, you’d have to pay capital gains tax on the remaining £147,000 at the standard CGT rates for individuals.

For the 2025/26 tax year, the Capital Gains Tax (CGT) rates for individuals are:

• 18% for gains within the basic rate income tax band.
• 24% for higher and additional rate taxpayers.

These rates apply whether the gain relates to residential property or other chargeable assets such as shares.

By contrast, with business asset disposal relief, you’d pay the BADR rate on the qualifying gains up to your lifetime limit. For disposals from April 2025, this rate is 14% (and is scheduled to increase to 18% from April 2026).

Let’s say your sale didn’t include a residential property, which means the whole £147,000 would otherwise fall within the standard CGT framework.

Without BADR, much or all of the £147,000 could be charged at 24% if you are a higher or additional rate taxpayer.

With BADR, the qualifying portion is charged at 14% for disposals in the 2025/26 year.

This is a substantial saving compared with paying 24% CGT on the same gains.

Using BADR via an MVL

If you are closing a company with significant reserves, BADR is often accessed via an MVL (Members’ Voluntary Liquidation).

By contrast, if you close via voluntary strike off, capital treatment is generally limited to total distributions of up to £25,000.

Above that level, distributions are taxed as dividends unless you use an MVL.

This £25,000 point is a tax treatment threshold rather than a Companies House rule.

How do you claim business asset disposal relief?

You can claim business asset disposal relief in one of two ways:

• On your self assessment tax return for the tax year in which you’ve closed or sold your business.
• Alternatively, by filling in Section A of the HMRC Business Asset Disposal Relief Helpsheet.

You can claim as many times as you like, provided your total profits don’t exceed £1 million over your lifetime. Once you hit the £1 million lifetime cap, you can no longer claim it and will need to pay capital gains tax at the usual rates.

Anti-avoidance rules

That said, if you’re closing down your business, you can’t be involved in a similar trade or activity for at least two years, or HMRC will treat your profit as an income distribution rather than a capital gains distribution.

This is the Targeted Anti-Avoidance Rule (TAAR), aimed at preventing phoenixing.

For example, taking the funds and immediately starting a near-identical company could see the distribution taxed as dividends at 8.75%, 33.75% or 39.35% depending on your income band, rather than at the BADR rate.

It’s worth noting that this rule can put contractors on murky ground. In particular, if you close your limited liability company and start contracting through an umbrella company, does it come into play?

While the answer isn’t always clear cut, the rules have been amended so that, if you continue being active in the trade as an employee and not as a business owner, it will be less likely that the main purpose of closing your business is tax avoidance.

For more on timings after liquidation, see our separate guide: how long after an MVL before you can start a new company.

Final word: what lies ahead for BADR?

Entrepreneurs’ relief has been a subject of controversy for years. The government did not scrap it but reduced the lifetime limit from £10 million to £1 million and rebranded it as BADR.

Rates have also changed, with the BADR rate increasing from 10% to 14% as of April 2025 and scheduled to rise to 18% as of April 2026.

If you’re considering selling or closing your contracting business, talk to your accountant before you do anything else.

This article is for general information only and does not constitute professional advice. Tax rules change, and their impact depends on your circumstances. Always seek advice before taking action.