Business Asset Disposal Relief Explained for Company Directors

Closing a solvent company is a significant step for any director. How you handle it can significantly affect the value you take away. Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief, is one of the most valuable tax reliefs available to company directors in this situation.

For those planning to close a company, BADR can reduce the Capital Gains Tax (CGT) rate to just 14% on qualifying gains. When combined with a Members’ Voluntary Liquidation (MVL), this can lead to substantial tax savings.

This guide explains what BADR is, who qualifies, how it works in an MVL, and what rules you need to consider.

What Is Business Asset Disposal Relief?

BADR is a tax relief that allows eligible company directors to pay CGT at a reduced rate of 14% on qualifying gains when disposing of all or part of their business. This lower rate applies to gains up to a lifetime limit of £1 million.

For company directors, BADR most commonly applies when:

• Retiring and closing a limited company
• Finishing a period of contracting and winding down a personal service company
• Selling or liquidating a business before moving on to a new opportunity.

The relief was introduced to reward business owners for building and growing companies. It aims to encourage entrepreneurship by ensuring more of the proceeds from selling or closing a business can be retained by the owner.

Who Can Claim Business Asset Disposal Relief?

Not every company director automatically qualifies for BADR. HMRC sets out specific conditions that must be met at the time of disposal and during a qualifying period beforehand.

For company directors, the main conditions are:

Shareholding: You must own at least 5% of the company’s ordinary share capital and voting rights.

Role in the company: You must be an employee or hold an office (such as a director).

Qualifying period: These conditions must have been met for at least two years prior to the date of disposal.

If any of these requirements are not met, BADR will not apply. This is why directors should review their status regularly, particularly if there are any changes to shareholding, structure, or roles within the company.

How BADR Works in a Members’ Voluntary Liquidation

Many directors close their solvent company through a Members’ Voluntary Liquidation. An MVL is a formal process run by a licensed insolvency practitioner, allowing company assets to be distributed to shareholders as capital rather than income.

This distinction matters. Capital distributions are taxed under CGT rules. For directors who qualify for BADR, this means a 14% CGT rate rather than the standard rate, which can be much higher.

This can represent a considerable tax saving for companies with significant retained profits. Planning ahead and confirming BADR eligibility before starting the MVL process helps ensure you can access these benefits.

Restrictions and Anti-Avoidance Rules

While BADR can be highly beneficial, HMRC has rules to prevent misuse.

One key consideration is the Targeted Anti-Avoidance Rule (TAAR). If you claim BADR when closing your company and then start a similar business within two years, HMRC may see the liquidation as an attempt to avoid tax and withdraw the relief.

This is an important consideration for directors who intend to set up a new business after closing their current company. Planning future activities carefully can help avoid jeopardising the relief.

Can Business Asset Disposal Relief Be Claimed More Than Once?

Yes. BADR can be claimed more than once, provided the total gains remain within the £1 million lifetime limit.

This is helpful for directors who have owned and closed multiple qualifying businesses over time. Each claim will count towards the lifetime allowance, but there is no limit on the number of times you can claim, as long as the combined gains do not exceed £1 million.

Do All Shareholders Need to Meet the Eligibility Criteria?

Each shareholder who wishes to claim BADR must individually meet the qualifying conditions.

This means holding at least 5% of the company’s shares, having the required voting rights, and being an officer or employee of the company for the two-year qualifying period before disposal.

If a shareholder does not meet these requirements, they cannot claim BADR, even if other shareholders qualify.

Planning Ahead to Make the Most of BADR

Business Asset Disposal Relief can make a significant difference when closing a solvent company. Combined with a Members’ Voluntary Liquidation, it allows directors to extract funds far more tax-efficiently. Directors who plan ahead are better placed to take advantage of the 14% CGT rate and preserve more of their company’s value.