Two Years, Five Per Cent, One Million: Protecting Business Asset Disposal Relief in 2026/27

For most of the last fifteen years, Business Asset Disposal Relief was the least contentious part of a business sale. The gain qualified, the rate was 10%, and the arithmetic was simple enough to sketch on the back of a completion statement. That certainty has gone. The rate moved to 14% for disposals in 2025/26 and to 18% from 6 April 2026, and the relief now sits at the same headline rate as basic-rate capital gains tax. For a director holding a lifetime's value in a trading company, the difference is not a rounding error.

On a £1 million gain within the lifetime limit, the tax has risen from £100,000 to £180,000 in two steps. On a £500,000 gain, it has moved from £50,000 to £90,000. That is the practical context in which owners are now weighing whether to sell in the current tax year, hold for a better price, or restructure ahead of a buyer appearing.

What the new rate does and does not do

The 18% rate applies to the whole qualifying gain. It is not a top-up; there is no banding within the relief. The consequence is that for an individual whose gains would otherwise be taxed at the basic rate, BADR now delivers no saving at all. Its remaining value lies in shielding gains that would otherwise attract the 24% higher rate — a margin of six percentage points rather than the fourteen that existed before April 2025.

That changes the cost-benefit of holding on. Where a sale could be deferred into a later tax year for commercial reasons, the deferral no longer carries the same tax penalty it once did, and equally there is no longer a large windfall from accelerating a deal into the current year. The relief still matters, but it is now a thinner slice of the proceeds.

The two-year clock, and what it measures

Relief is not automatic. For shares, the individual must have held the shares, and the company must have been a trading company, for at least two years ending with the date of disposal. A sale on 30 November 2026 therefore looks back to 30 November 2024. Both the ownership and the trading condition must hold throughout that continuous window.

The trading test is more elastic than it looks. HMRC does not assess the company's status on its activities alone; it looks at the whole picture, including the balance sheet. A trading company that has accumulated a substantial investment portfolio, retained cash far beyond the needs of the trade, or let commercial property to a third party can drift outside the definition without anyone noticing. Because the test is applied across the full two years, a single poor year can be enough to break the chain.

The personal company test: five per cent, four ways

Since the rules were tightened in 2019, an individual must hold at least 5% of the company's ordinary share capital and at least 5% of the voting rights. In addition, they must be beneficially entitled to at least 5% of the company's distributable profits and to 5% of the assets available on a winding up.

That four-part test is where alphabet shares cause difficulty. A structure in which one class carries the dividend rights and another the votes will often mean that no single holder clears all four thresholds, however generous the overall shareholding looks on paper. Shares held through a family trust, or subject to restrictions in the articles, can have the same effect. The remedy is to review the articles and any shareholders' agreement well before a sale process begins, because a variation of class rights made in the final months will not help: the tests must be met throughout the two-year period.

The employment test

Throughout the same two years the individual must have been an officer or employee of the company, or of another company in the same trading group. Non-executive directors count; so do part-time roles, provided the appointment is genuine. What does not count is a directorship that has been quietly relinquished. A director who resigns in the spring and completes a sale in the autumn will have broken the employment condition, and the disposal will fall outside the relief. Where a sale is in prospect, the resignation letter should wait.

The £1 million lifetime limit

The limit is cumulative and personal. Once £1 million of qualifying gains has been claimed, the relief is exhausted for good, whatever the interval before the next disposal. It is not indexed and it is not restored by a change in the rate. Spouses and civil partners each have their own limit, and a modest amount of planning at the point of sale can ensure both are used where both genuinely qualify.

Where claims quietly fail

The most common causes are structural rather than arithmetic. Substantial non-trading activity inside a company is the first. A bloated cash balance held for years is the second. A holding company inserted above the trading company shortly before a sale is the third: the new company must itself satisfy the trading and personal company tests for the requisite period, and the two-year clock starts from the restructuring, not from the original incorporation. A restructure that is worth doing for commercial reasons can be worth doing two years before a buyer appears, and rarely at the point of heads of terms.

Associated disposals deserve a mention too. Where an owner sells a property or other asset that was used in the business and is personally owned, relief can be available on the associated disposal, but only if the personal company test was met for the two years before the disposal and the asset was used for the trade throughout. An asset let to the company at a market rent can complicate the position.

Making the claim

The claim is made through Self Assessment. The deadline is 12 months after the normal filing date for the return covering the year of disposal — for a 2026/27 disposal, that is 31 January 2029. Late claims are possible but not guaranteed, and an amended return is far easier to file than a written request after the window has closed.

Steps to take before a buyer appears

Diarise the qualifying dates and check them annually, not at the point of sale. Review the balance sheet for investment activity and excess cash, and consider whether dormant subsidiaries in a group structure still serve a purpose. Read the articles of association and confirm that the 5% tests are satisfied on every limb. Keep contemporaneous evidence of employment — PAYE records, board minutes, a service contract — because HMRC will ask for it. And take advice on timing while there is still time to act on it. The relief is still worth having; it is simply no longer worth assuming.