Business Asset Disposal Relief: what SMEs need to know now that the rate has settled at 18%

Business Asset Disposal Relief, formerly Entrepreneurs‘ Relief

Business Asset Disposal Relief (BADR), renamed from Entrepreneurs’ Relief and updated in the Finance Act 2020, reduces the rate of Capital Gains Tax (CGT) on disposals of certain business assets. The name change took effect on 6 April 2020.

How does BADR compare to a dividend distribution now?

BADR is available for the disposal of a business by sole traders, partners in a trading partnership, and shareholders in an unlisted trading company, subject to a number of specific conditions. This article focuses on shareholders in unlisted trading companies.

When closing down a limited company, the final distribution of funds can be treated as either an income distribution or a capital distribution. In general, a capital gain is usually favoured over dividend treatment, though the gap has narrowed. Dividend tax rates increased from April 2026 and now stand at 10.75% for basic rate taxpayers, 35.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers. Dividends also count towards total income and can reduce the personal allowance available where an individual has total income of over £100,000.

This compares with CGT paid on a capital distribution of 18% or 24% for higher rate taxpayers, or 18% flat if the gain qualifies for BADR. An additional rate taxpayer receiving £100,000 on the liquidation of their company would pay around £39,350 if taxed as a dividend, but £18,000 if BADR is available. The saving is significant, but it is roughly half the size of the gap that existed when BADR sat at 10%.

Will I qualify for BADR?

If you close your business through an MVL and the funds are paid out via capital distribution, you will normally pay CGT on the amount distributed, at a rate of either 18% or 24%. You may be able to claim BADR on the disposal of business assets or shares in your personal company, provided you meet the qualifying conditions and have done so for at least 24 months, reducing your tax burden to a flat 18%.

To count as a personal company, you must hold at least 5% of the ordinary share capital, and those shares must give you at least 5% of the voting rights. These conditions must be met in the two years before sale, or the two years before the company ceases to trade. Where the trade ceases, BADR can still be claimed on distributions made within three years of that date.

Once a company is placed into MVL, the liquidator makes a capital distribution to shareholders, who then claim on their personal tax return for the funds received, or the value of assets received, to be taxed at 18%.

MVL and BADR remain a tax-efficient route for accessing assets in a company you are wishing to close down, even at the higher rate. Not all companies can enter an MVL, and there may be other qualifying issues to consider if the disposal or closure is not straightforward. As always, it’s important to seek expert advice as early as possible in the process.

Business owners looking to sell may need to act now

The phased BADR increase is now complete. Where earlier versions of this guidance framed 2025 and early 2026 as a window to act before rates rose, that window has closed: 18% is the rate now, not a future one. Business owners weighing an exit should factor in the current rate rather than planning around the old 10% figure, and should speak to an adviser about how the narrower gap between capital and income treatment affects their specific numbers.