Business Asset Disposal Relief (BADR): Breakdown of Forthcoming Changes
12th February 2025
Within her Autumn 2024 budget statement, Chancellor Rachel Reeves announced that the rates associated with Business Asset Disposal Relief (BADR) would be increasing. Part of a broader strategy to increase tax revenues, the rates will be increased to 18% over a phased, 2-year approach. The government has stated that the phased implementation of changes will provide time for business owners to plan around the changes, but the impact could nonetheless be significant for those looking to sell their business or assets, potentially driving a long-term, negative impact on the economy.
In this article we break down the key changes and potential impacts to those affected by the forthcoming changes.
What is Business Asset Disposal Relief?
Business Asset Disposal Relief is a tax relief that allows business owners to pay a reduced rate of Capital Gains Tax (CGT) when selling or disposing of their business or qualifying assets.
Previously known as Entrepreneurs’ Relief, BADR offers a reduced CGT rate of 10% for eligible taxpayers on the first £1m of qualifying gains. This applies to sole traders, partnerships and those with shares totalling over 5% in a limited company.
Changes to Business Asset Disposal Relief
In the Autumn 2024 Budget Chancellor Rachel Reeves announced impending changes to the CGT rates linked to Business Asset Disposal Relief. Set to be introduced over the next two years, these rate adjustments include:
- For disposals made on or after 6 April 2025, the Capital Gains Tax (CGT) rate under BADR will rise from the current 10% to 14%. In real terms this would mean a business owner selling their company for £1m after this date would pay £140k in CGT rather than the previous liability of £100,000.
- For disposals on or after 6 April 2026 the rate of CGT associated with BADR will increase further to 18%. Using the above example, the same business owner would then be subject to £180k in CGT from this date for an equivalent sale.
- The lifetime limit of qualifying gains will remain unchanged at £1m
Who will be impacted?
The changes to CGT rates associated with BADR will have significant impact on UK businesses looking to dispose of assets, particularly small business owners and entrepreneurs.
Business Owners Looking to Sell
- Entrepreneurs and business owners planning to sell their businesses will now face the higher Capital Gains Tax rate, meaning lower post-tax profits from business sales. This may impact retirement plans or reinvestment strategies for business owners.
Investors in Startups and Small Businesses
- Angel investors and venture capitalists typically fund startups expecting a profitable exit – in particular tech or fintech investments where large returns are forecasted. Higher CGT on disposals could reduce investment attractiveness in UK startups or mean higher valuations or alternative, more tax-efficient business structures to minimise liabilities, such as Employee Ownership Trusts (EOTs).
Potential Business Buyers
- Buyers may face higher acquisition costs as sellers factor tax increases into the sale of their business. This may result in a higher number of sales prior to the increase deadlines as businesses and investors try to push through sales or, conversely, a slowing down in sales to see if the situation changes.
Business Succession Planning
- Business owners passing their company to the next generation may consider alternative options to sales – such as the use of family trust structures or gifting strategies to try and mitigate the impact of raised CGT. Other strategies to reduce taxable gains could be explored such as; selling shares over time; corporate sales rather than asset disposal; or the use of Enterprise Management Incentives (EMI).
The UK Economy and Entrepreneurship
- The higher tax burden on selling businesses could reduce motivation for people to start and grow businesses in the first place, or to choose alternative, international geographies in which to set up. This could have a longer-term impact of slowing down UK economic growth and innovation.
Greater Reliance on Tax and Financial Advisors
- With a more complex tax environment, businesses are likely to seek more professional tax advice to optimise their business exit strategies – accountants and tax advisors may see increased demand from business owners looking for tax-efficient sale structures
Summary
While the reduction in BADR tax relief will generate additional government revenue, it could also discourage entrepreneurship, slow down business exits and alter investment behaviours in the UK, leading to unintended economic consequences. The biggest impact will be on entrepreneurs, small business owners and investors – particularly those planning to sell businesses in the next few years. Shorter-term, there may be a rush to sell businesses before the April 2025 deadline but, over time, businesses will eventually need to adapt to a higher-tax environment through alternative financial and tax planning strategies.
If you are impacted by these changes and need support or guidance on what to do next, particularly if you are planning to sell your business in the foreseeable future, please do contact our expert tax planning team for help.
