Business Asset Disposal Relief – Trading or Investment?

Business Asset Disposal Relief (BADR), which replaced Entrepreneurs’ Relief (ER) in 2020, continues to offer valuable tax savings to qualifying business owners — but only where strict conditions are met.

Although BADR operates in much the same way as its predecessor, its scope has narrowed significantly. The lifetime limit of gains eligible for the 10% tax rate is now £1 million (down from the previous £10 million ER limit). Gains above this threshold are taxed at the standard 20% capital gains tax (CGT) rate — so the relief can still save up to £100,000 in tax for those who qualify.

Key Conditions for BADR

To qualify for BADR on the disposal of shares in a trading company, the following conditions must all be met:

• The individual making the disposal must be an officer or employee of the company.

• The company must be a trading company, or the holding company of a trading group.

• The individual must hold at least 5% of the ordinary share capital and voting rights.

All conditions must be satisfied for a minimum of two years up to the date of disposal.

BADR can also apply where a company has ceased trading, provided it is liquidated within three years of cessation and all other conditions remain satisfied.

However, BADR is never available for investment businesses — such as property rental or investment holding companies — because they are not considered “trading” for tax purposes.

When a Company Is Not Trading: A Recent Tribunal Example

A recent Tax Tribunal case highlighted how important it is to distinguish between trading and investment activity when claiming BADR.

In this case, the shareholders of a company sought to show that their business had changed from being an investment company to a trading company, in order to claim BADR on distributions made during liquidation.

Case Summary

• The company’s only asset was a parcel of land, which originally included a protected site.

• At acquisition, the land was intended to be held as a long-term investment.

• After the protections were lifted, the land was identified as suitable for mixed-use development.

• The company sought planning permission and, in December 2013, appropriated the land to trading stock in its accounts.

• The site was then sold in January 2016, and the company entered members’ voluntary liquidation two months later.

The three shareholders claimed Entrepreneurs’ Relief (as it was then called) on the liquidation proceeds, arguing that the company had started trading in December 2013 when its “intention changed” to developing or selling the site.

HMRC disagreed — and the Tribunal upheld HMRC’s view.

Why the Relief Was Denied

The Tribunal decided that the company was investing in land, not dealing in land, and therefore was not a trading company.
Key reasons included:

• The company did not intend to develop the site or make any substantial changes to it.

• Simply changing its intention to sell the land did not amount to trading activity.

• Appropriating the land to trading stock for accounting purposes carried no weight unless an actual trade was being carried on.

• The company lacked the funds, expertise, or infrastructure to carry out development itself.

• It had effectively sold an investment, rather than traded in land.

As a result, Entrepreneurs’ Relief (now BADR) was not available to the shareholders, and their gains were taxed at the normal 20% rate.

The Importance of the ‘Trading’ Test

Whether or not a company qualifies as trading is critical for several valuable tax reliefs — not just BADR, but also for:

• Business Property Relief (BPR) for inheritance tax, and

• Substantial Shareholdings Exemption (SSE) for corporate disposals.

Unfortunately, the distinction between trading and investment is not always clear-cut. Many disputes arise where companies hold or sell property, intellectual property, or other mixed-use assets — and these cases frequently end up before the Tax Tribunal.

How to Avoid Risk

If you are planning to sell a business or enter liquidation, it’s essential to review your company’s activities and structure well in advance.
You should:

• Confirm that your company meets the “trading company” definition under HMRC rules.

• Ensure that any shift from investment to trading activity is genuine and clearly documented.

• Take professional advice before making disposals or planning distributions.

Claiming BADR incorrectly can lead to HMRC challenges, lost relief, and additional tax liabilities.

How Merranti Can Help

At Merranti Accounting, we can help you determine whether your company qualifies as trading for BADR purposes, guide you through the conditions, and ensure any claim is properly supported by evidence.

We also advise on:

• Pre-sale reviews and structuring to protect BADR eligibility,

• Post-trade cessation planning within the three-year window, and

• Alternatives where BADR is unavailable (such as investor relief or group restructuring).

Never assume your disposal automatically qualifies — seek advice early to protect your position.