Guide
The BADR two-year rule and the 5% test
Updated
The relief is worth up to £60,000 on a £1,000,000 gain against the 24% rate. It is also the easiest thing to lose by restructuring in the wrong month.
What has to be true, and for how long
For a sale of shares, gov.uk sets out that both of the following must apply for at least two years up to the date you sell: you are an employee or office holder of the company (or one in the same group), and the company's main activities are trading rather than non-trading activities like investment, or it is the holding company of a trading group (gov.uk).
Where the shares are not from an Enterprise Management Incentive, the company must also have been your personal company for those two years: you hold at least 5% of both the shares and the voting rights, and you are entitled to at least 5% of either the profits available for distribution and assets on winding up, or the disposal proceeds if the company is sold. HMRC's Capital Gains Manual works through the statutory conditions at CG63975 (TCGA92/S169I).
Sole traders and partners
The test is different: you must have been a sole trader or business partner and owned the business for at least two years up to the date you sell, and the same conditions apply if you are closing the business instead. Where you dispose of assets after the business has ceased, gov.uk requires the disposal to happen within three years of cessation.
The traps worth knowing before you restructure
- Resigning early. Stepping down as a director or employee before completion can break the two-year officer or employee condition.
- Dilution below 5%. A new share issue can push you under the personal company threshold. There is an election that lets you crystallise and bank the relief at that point, but it has to be made.
- Too much cash on the balance sheet. Substantial non-trading activity can put the trading company test in doubt. The test is about the company's activities, not just its trade description.
- Alphabet shares and rights. The 5% test looks at shares, votes and economic entitlement together, so a share class without votes or without a proportionate right to proceeds can fail it.
- The lifetime limit is per person. Spreading ownership across family members who genuinely meet the tests is a planning point; retrofitting it in the weeks before a sale is not.
These are the headline conditions, not the full statute. HMRC's manual runs to dozens of pages, and every one of the traps above turns on facts a calculator cannot see. Confirm your position with a tax adviser before you sign.