What Is Entrepreneurs’ Relief and How Does It Work?

If you are thinking about selling your business, shares or assets, there is a high chance you would have to pay a large percentage of your profit towards Capital Gains Tax (CGT). 

Which means you will need to pay CGT on any profit, or gain made above your tax-free allowance whenever you sell or dispose of any eligible asset.

However, entrepreneurs’ relief can significantly reduce this tax burden. It is now referred to as Business Asset Disposal Relief, but the former term is still commonly used in the UK. 

This relief essentially helps many business owners to qualify for a reduced CGT rate on qualifying business disposals.

What Is Entrepreneurs’ Relief?

Entrepreneurs’ Relief was introduced in 2008 to help encourage entrepreneurships and reduce the CGT burden on anyone selling their own business. 

The rate of this relief has changed significantly over time. If you had sold your business in the 2024/2025 tax year, you only had to pay CGT at a rate of 10%. 

However, the 2024 Autumn Budget has increased this rate:

• From 6 April 2025: The CGT rate for all qualifying disposals has increased to 14% (up from the previous 10%)
• From 6 April 2026: the CGT rate will further increase to 18%.

This relief has been designed to reward business owners and investors, when they decide to sell or close their business, making it a valuable part of tax-efficient exit planning.

Who Can Claim Business Asset Disposal Relief?

There are several criteria that can determine if you can claim Business Asset Disposal Relief when selling or closing your business. 

To be eligible for this relief, you must:

• Be an individual, Companies can’t claim this relief
• Have been a sole trader or business partner for at least two years up to the date of sale
• Have owned a business for at least two years up to the date of the sale
• Dispose of your business assets within three years of the sale

These rules state that if you were to become a partner in a business, you must wait at least two years before qualifying for the Relief. 

Similarly, if you are closing your business, instead of selling it, you still need to get rid of any business assets within three years of the date your business officially stopped trading.

How does the claim work for Shareholders?

In order for you to be qualified to sell shares, your business must meet these few conditions:

• You must have owned five percent or more of the shares and voting rights for at least two years before the selling date
• You were a company employee or director for two or more years before the date of disposal (unless retired due to illness of health problems)
• The company must be primarily engaged in active trading rather than just holding investments or property for two or more years before selling.
  

What Qualifies for BADR?

With the CGT rate now at 14%, it is important to understand exactly what qualifies for Business Asset Disposal Relief. 

Here is what you need to know about eligible transactions under the current relief laws:

Qualifying Disposals (14% Rate) 

You can get the Business Asset Disposal Relief if you are doing any of these things:

• Selling your entire business as s sole trader or partner
• Disposing of a distinct business division or standalone operation
• Liquidating assets within 3 years after closing your business
• Selling shares of your personal company (while meeting the 5% ownership rules)
• Transferring your business property used in daily operations

What Doesn’t Qualify for BADR?

If these criteria apply to you, then you won’t be able to qualify for the Business Asset Disposal Relief. The relief is not applicable on you if:

• You are selling buy-to-let properties or investments that weren’t actively used in trades
• You are disposing shares in a company without having any director or employee status
• You are selling personal assets that have never been for any business purposes or trading

2025 Update: Business Asset Disposal Relief Lifetime Limit

HMRC has set a limit to how many times you can claim Corporate Governance Tax under the Business Asset Disposal Relief. 

As of 2025, this limit is £1 Million, meaning you can claim a total of £1 million in total in your lifetime. Historically, this limit has been decreased from £10 million to £1 million since March 2020.

Once you have claimed a total of £1 million in total, any additional capital gains will be taxed at the 18%( basic rate) or 24%(Higher rate). 

This applies to any disposals made in the 24/25 tax year. From April 2026, this rate will increase to a basic rate of 20% and a high bracket rate of 28%.

Since the 14% rate window is closing from April 2026, it is recommended that you try to maximise your £1 million allowance. 

If you are planning to sell your business before April 2026, you would be saving at least £40,000 as compared to the 18% higher rate from next tax year.

How to Claim Business Asset Disposal Relief (2025 Guide)

Claiming the Business Asset Disposal Relief is not fairly a complex procedure, although it is important to note that this relief must be actively relieved rather than an automatic relief. 

There are two ways you can claim this relief as mentioned in the next section.

Option 1: Self-Assessment Tax Return (Recommended)

The most straightforward method is claiming BADR through your Self-Assessment tax return. Firstly you’ll need to report the disposal or sale in the Capital Gains Tax Section. After this, you would be required to complete the Business Asset Disposal Relief Claim section. 

This claim has to be filed by 31 January following the end of the tax year in which you made the disposal. This means that if you have made the disposal/sale in the 24/25 tax year, then you would have to file it before 31 January 2026. 

Option 2: Standalone Claim

If you are not required to file a Self-Assessment Tax Return, you have the option to make a standalone claim in writing to HMRC. This Written claim must include full details of the disposals and must reach HMRC within 12 months after the 31 January deadline following the tax year of disposal. 

If you have made the disposal in the 24/25 tax year, then you must file the claim within 12 months following 31 January 2026.

Critical Documentation Requirements

You must maintain comprehensive documentation records for at least 6 years after filing the claim. This is required as HMRC may request evidence to support your claim. 

These documents include proof of ownership (such as certificate of shares or partnership agreements), disposal contracts, and all company records that demonstrate your eligibility as an officer or an employee.

Common Mistakes and Misconceptions

Many Business owners might jeopardise their tax savings through some simple errors, but they may cause some significant consequences.  

Here are a few common pitfalls we see business owners make:

1. Countless claims fail because owners don’t meet the strict 2-year ownership requirement.  You will only get the claim if all the conditions are met.
2. Many individuals sometimes mix-up qualifying and non-qualifying assets like business premises and buy-to-let properties. The later one doesn’t qualify for the BADR.
3. BADR must be claimed actively – if you are waiting that HMRC will apply it automatically, then you may as well wait indefinitely. 
4. If you own 5% of the shares and want to sell it, but you aren’t an active employee or a director, then you aren’t eligible for the claim.
5. It’s important to understand that even claims made a decade ago still count towards your £1 million lifetime limit. This means it doesn’t matter when you claim it — it all adds up over your lifetime.
6.  If you sell your company assets within 3 years of the business closure, only then you are eligible for the claim. Selling your assets after the 3 year deadline means you will be taxed at a higher CGT rate. 

Entrepreneurs’ Relief vs. Other Reliefs

If you do not qualify for the Business Asset Disposal Relief, there are other reliefs that may apply to you depending on your situation. 

Some of these reliefs are explained below.

1. Investors’ Relief 

Investors relief was introduced in 2016 for all the qualifying investments.This relief is aimed to help entrepreneurial investors who want to inject new capital investments into unlisted trading companies. 

It offers a reduced CGT tax rate of 14% from April 2025 and 18% from April 2026. IR only applies to gains or shares subscribed by an investor, their spouse or civil partner. It has a lifetime limit of £1 million. 

2. Holdover Relief (Deferred Tax)

Handover Relief is also known as the Gift Relief, as it allows individuals to defer paying CGT when they transfer or gift a business asset to someone else. 

Therefore, instead of paying CGT at the time of transfer, the gain is deferred and passed on to the recipient of the asset. This relief is highly useful for inheritance planning. 

3. Incorporation Relief (Deferred Tax)

Incorporation Relief is a tax benefit which enables individuals to delay paying CGT on a property when they are transferring it to a limited company in exchange of shares. This process defers the tax until they decide to sell the shares. 

This relief mostly applies to landlords. In order to qualify for this relief, landlords must disclose to HMRC that they operate as a business and are not just considered as a passive investment.  

Should You Seek Professional Advice?

While the Business Asset Disposal Relief seems straightforward, the eligibility criteria surrounding it is full of pitfalls. There are many hidden complexities that often trip up business owners in the process. 

The current 14% CGT rate is followed by strict conditions, seemingly minor oversights like missing the 2-year ownership window can invalidate your claim. Similarly some asset classifications errors may lead to partial disqualification from the relief. It might be hard for individuals to carefully track their £1 million limit across all disposals.

We highly encourage all individuals to speak to an accountant before disposing of any business assets. This will ensure that you maximise your relief, avoid any costly claim rejections, while also optimising your time before the upcoming 2026 rate increase.

Conclusion

Business Asset Disposal Relief offers a valuable 14% CGT rate (rising to 18% in 2026) for qualifying disposals. To benefit, you must meet strict criteria including the 2-year ownership rule and £1 million lifetime limit. With the rate increase approaching, strategic timing could save you thousands. 

Many business owners risk missing out due to complex eligibility rules or poor planning. Professional advice ensures you maximise relief while avoiding costly mistakes. 

At Heighten Accountants, we specialise in helping business owners like you navigate complex tax reliefs like BADR to ensure that you keep more of your hard-earned profits. 

We help review your eligibility and identify potential pitfalls before you sell your business. We will also help you calculate your optimal timing to lock in the current 14% rate before the 2026 increase. 

At Heighten, we can handle your entire claim to prevent costly HMRC rejections.