BADR at 18% and incorporation relief: the reliefs that decide the bill when you sell or restructure

For most of its life, the relief now called Business Asset Disposal Relief was the closest thing British tax offered to a retirement plan. Build a company, sell it, and pay 10% on the way out, at one stage on gains of up to £10 million. That world has been dismantled in careful steps, and the last one landed this April. The rate is now 18%, the lifetime limit is £1 million, and the most the relief can ever save a higher rate taxpayer is £60,000.

The squeeze came from both directions. The lifetime limit, £10 million as recently as March 2020, was cut to £1 million overnight. Then the Autumn 2024 Budget set the rate on a staircase, 14% from April 2025 and 18% from April 2026, while the main capital gains rates settled at 18% and 24%. The arithmetic of an exit has changed accordingly. A founder realising a £2.5 million gain in 2015 paid £250,000. The same exit today costs £540,000, more than double, with £360,000 of it falling on the slice the relief can no longer reach.

There is a quieter consequence too. At 18%, BADR now exactly matches the basic rate of capital gains tax. For someone whose gains fall within their basic rate band, the relief saves nothing at all this year. Its entire value now lives in the six point gap below the 24% higher rate, which is why using it well, and not wasting it, has become a matter of precision rather than instinct.

What BADR still gives you, and the conditions with teeth

The relief applies to a disposal of all or part of a business, or of shares in your personal trading company, where the conditions have been met throughout the two years ending with the disposal. For a company, that means four things at once for the whole two years: at least 5% of the ordinary share capital, at least 5% of the voting rights, an entitlement to at least 5% of either the distributable profits and assets on a winding up or the sale proceeds, and a role as director, other officer or employee. The company must be a trading company or the holding company of a trading group, which is why property investment and other largely passive companies are outside the relief altogether.

Sole traders and partners qualify on the sale of the whole or part of their business owned for two years, and on assets sold within three years after the business stops. A retiring shopkeeper who closes down and then sells the freehold is inside the relief; wait past the three year mark and it is gone. Winding a company up through a members voluntary liquidation can also qualify, with one warning attached: a targeted anti avoidance rule can convert the distributions into income if you carry on the same trade in a new vehicle within two years, so liquidate and restart is not a plan, it is a trap.

The £1 million is a lifetime limit per person, not per business, and every claim you have ever made under this relief or its predecessor counts against it. Spouses and civil partners each have their own £1 million, which is where the real planning now lives: a shareholding rebalanced between a couple well before a sale, with both meeting the conditions for the full two years, doubles the relieved amount.

The rollover that has not moved

While BADR shrank, incorporation relief sat untouched, and it has quietly become the more dependable of the pair. When a sole trader or partnership transfers its business to a company, tax law treats the transfer as a sale at market value, because the owner and the company are connected. On paper that crystallises the growth in goodwill, property and other chargeable assets, a bill that could sink the incorporation before the company files its first accounts. Incorporation relief exists to stop that: the gain is rolled into the base cost of the shares received, and no capital gains tax is payable until the shares themselves are sold.

The relief is automatic when the conditions are met, with no claim needed. The business must go across as a going concern, the whole of its assets other than cash must transfer, and the consideration must be wholly or partly shares. Take part of the price as cash or a loan account and the relief is scaled back in proportion, which is a choice as much as a constraint: some owners deliberately take a measured amount of non share consideration to crystallise a gain that soaks up losses or the £3,000 annual exempt amount, rolling over the rest.

For landlords the question is harder and the stakes higher. The relief needs a business, and letting property only clears that bar where the activity is substantial and sustained, the standard set by the Ramsay case, in practice often evidenced by around 20 hours a week of hands on management across a meaningful portfolio. A passive portfolio does not qualify, and getting this wrong means the full gain landing at up to 24% in one tax year. Incorporation also triggers Stamp Duty Land Tax on the market value of any property moved in, a second bill that has ended many incorporation plans on its own; our separate insight on Stamp Duty Land Tax covers that side.

Two more points belong in every incorporation conversation. First, the company gets no corporation tax deduction for amortising goodwill bought from a related party, so the goodwill value that drives the capital gains position gives nothing back inside the company. Second, where the rollover is unwanted, an election can disapply it, most commonly where the owner would rather pay some tax now to create a director's loan account that can be drawn later without further tax. Which route wins is arithmetic, not doctrine, and it changes with every rate move.

The goodwill trap and the look through that saves quick sales

The two reliefs collide exactly where owners expect them to cooperate, and the traffic runs in both directions, one rule against the taxpayer and one for them.

The rule against: BADR is specifically denied on goodwill transferred to a close company related to the seller. In plain terms, incorporate your own business into your own new company, disapply the rollover and try to bank BADR on the goodwill gain, and the legislation says no, a block in place since December 2014 precisely because that route was once a standard manoeuvre. Other assets moved across, such as premises, can still qualify, but the goodwill, usually the largest number on the incorporation, cannot. Anyone modelling the pay now to create a loan account route needs this in the spreadsheet from the start, because the tax on the goodwill element will be at full rates.

The rule in your favour is newer and still widely missed. Selling shares normally requires the company conditions to have been met for two years, which seems to doom anyone who incorporates and then receives an offer soon after. Since April 2019, the law looks through the incorporation: where the shares were issued in exchange for the transfer of the business as a going concern with the whole of its assets other than cash, the years the owner ran the unincorporated business count towards the conditions. The clock does not restart at incorporation.

Nothing here happens by itself, except the one thing that does

BADR must be claimed. The deadline is the first anniversary of 31 January following the tax year of the disposal, so a sale in 2026/27 must be claimed by 31 January 2029, normally in the capital gains pages of the tax return. Miss it and the relief is simply lost, whatever the merits. The tax itself follows the normal self assessment timetable, and where shares are sold the paper trail matters: the two year history of the shareholding, the payroll or officer record, and the company's trading status are what HMRC tests when it looks at a claim.

Incorporation relief is the mirror image: it applies by itself when the conditions are met, and it is the escape from it that has a deadline. The election to disapply must normally be made by the second anniversary of 31 January following the tax year of the transfer, shortened by a year where all the shares have been sold by the end of the tax year after the transfer. Whichever way that choice goes, a market value exercise at incorporation, on goodwill especially, is not optional: it fixes the gain, it is the number HMRC is most likely to challenge, and it needs to be defensible on day one.

Estimate the tax on a business sale