Most owners start thinking about tax on a sale when a buyer appears. By then, many of the decisions that shape the final bill have already been made, or can no longer be made in time. Exit planning works best two to three years ahead, and the recent changes to Business Asset Disposal Relief make that more important, not less.
What Business Asset Disposal Relief does
Business Asset Disposal Relief (formerly Entrepreneurs' Relief) reduces the Capital Gains Tax rate on qualifying gains when you sell all or part of a business, or shares in your trading company. The rate has risen in stages:
- 10% on qualifying disposals up to 5 April 2025
- 14% from 6 April 2025 to 5 April 2026
- 18% from 6 April 2026
There is a lifetime limit of £1 million of qualifying gains per person. Gains above that are taxed at the normal Capital Gains Tax rates of 18% or 24%, depending on your income.
At 18%, the relief is still worth having, but the gap against the main 24% rate is narrower than it was. That shifts attention from the relief itself to the structure and timing of the whole deal.
The conditions that catch people out
For a sale of shares, the company must broadly be your "personal company" throughout the two years before the sale. In outline, that means:
- You hold at least 5% of the ordinary shares and voting rights, plus at least 5% of either the profits and assets available on a winding up or the proceeds on a sale.
- You are an officer or employee of the company.
- The company is a trading company, or the holding company of a trading group.
The details are in HMRC's Capital Gains Manual from CG63950 onwards, and on the GOV.UK Business Asset Disposal Relief page.
Three problems come up again and again:
- Too much cash or investment in the company. Surplus cash, investment property or other non-trading assets can call trading status into question. It is far easier to deal with this years before a sale than during due diligence.
- Shareholdings that change late. Bringing in a spouse, family member or key employee close to a sale may mean they do not meet the two-year test.
- Diluted holdings. A new share issue that takes someone below 5% can remove their entitlement, although an election may be available in some cases.
Timing and structure matter more than the headline rate
With the rate now fixed at 18%, the bigger planning questions are usually about the deal itself:
- Who owns the shares. Each qualifying individual has their own £1 million lifetime limit, so shareholdings put in place early can matter.
- How the price is paid. Deferred consideration and earn-outs are taxed differently depending on how they are structured, and can affect when tax is due.
- The route to exit. A trade sale, a management buyout, a company buying back its own shares or an Employee Ownership Trust each carry different tax and commercial outcomes.
- The date of disposal. For Capital Gains Tax, this is normally the date an unconditional contract is made, not the completion date. HMRC's rules on timing and rate changes are at CG10245.
The relief must be claimed, normally by the first anniversary of 31 January following the tax year of the sale.
Clean numbers raise the price
Tax is only part of an exit. Buyers pay for confidence, and due diligence tests it hard. Late or unreliable management accounts, unclear project margins, mixed personal and business costs, or an unexplained tax position all give a buyer reasons to lower the price or add protections to the contract. Our article on building a finance function to match the business covers what buyers expect to see.
A sensible timeline
- Three years out: review share ownership, trading status and surplus assets. Start producing reliable monthly management accounts.
- Two years out: make sure everyone who expects relief meets the two-year conditions. Tidy up director's loan accounts and related-party arrangements.
- One year out: model the likely deal structures and their tax outcomes, and prepare for due diligence.
- During the deal: take specialist tax and legal advice on the contract before it is signed.
Thinking about a sale in the next few years? Book a free strategy call and we'll help you see what a buyer will see.
This article is general information, not tax advice for your specific circumstances. Always take specialist advice before a sale.
