Don’t forget about BADR in transactions
17th October 2025
Posted in Articles, Business Asset Disposal Relief by Forbes Dawson
Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief is possibly nearing extinction. It was not long ago that there was a lifetime limit of £10m on gains qualifying for BADR and there was a favourable capital gains tax rate of 10% on these gains. That lifetime limit was then cut to £1m and last year’s budget announced measures to taper away the rate too. The BADR rate for 2025/2026 is 14% and that will increase to 18% from 6 April 2026.
Although the relief is less valuable, it should not be ignored. Given that the top rate of capital gains tax is 24%, BADR can still be worth £100,000 or £200,000 for a married couple in 2025/26. Although certain qualifying conditions need to be met for two years up to disposal (the company needs to be a trading company or the holding company of a trading group, and the shareholder needs to have a 5% shareholding and been an officer or employee of the company or a group company) there are still ways to ‘mess things up’.
Example
Ged is selling his shares to another company for £2m. The acquiring company will pay £500,000 of cash upfront and then £500,000 on each of the first, second and third anniversaries of the transaction. The deferred proceeds have been structured as loan notes which are not ‘qualifying corporate bonds’. Assume that Ged and the company meet all the BADR conditions.
Prima facie, Ged will only qualify for BADR on £500,000 of cash proceeds. This is because the remaining gain will ‘roll forward’ into the loan notes until they crystallise. On crystallisation there would be no BADR because Ged would not meet the BADR conditions because he will hold no shares in the acquiring company.
All may not be lost in the above example because Ged could make what is known as a section 169Q election by 31 January following the end of the tax year. This has the effect of treating the £1.5m of loan notes as if they were cash and so Ged would be taxed on everything at the outset. However, such an election is ‘all or nothing’ and so Ged would not be able to defer tax payments in respect of £1m of loan notes which would not benefit from BADR.
Forbes Dawson view
We are noticing that BADR is sometimes not being given the respect that it deserves, probably because it is of far less value than it was years ago. However, £100,000 is £100,000 and should be protected.
Things could have been improved in the above example, possibly by restructuring the deal as £500,000 cash, £500,000 simple deferred consideration and £1m of loan notes. This could have given Ged the best of both worlds because he could pay 14% on £1m of gain and then defer tax liabilities on the remaining £1m of loan notes.
Ged may not want to defer tax though if he fears that capital gains tax rates are going to increase from 24%. That is where the section 169Q election could come in handy, although there is a slight risk that any future tax increase may be coupled with measures to undo benefits sought from making an election after the changes have been announced.
The key message is that BADR should be kept very much on the agenda where share disposals are concerned.
