BADR and Company Directors: The Shareholding Requirements You Must Meet

To claim Business Asset Disposal Relief on a share sale, a director must hold at least 5% of the ordinary share capital and 5% of the voting rights, and be entitled to at least 5% of distributable profits and of assets on a winding up, throughout the two years ending on the date of disposal. Miss any one of those limbs by a single share or a single day and the entire gain moves to the main capital gains tax rate, costing 6 percentage points of tax on every pound. For business asset disposal relief UK 2026 claims, that is £60,000 on a £1,000,000 gain. Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice, reviews shareholdings for directors ahead of a sale. This article explains each shareholding limb, the alternative test, the exceptions for EMI shares, and the dilution election.

Key Takeaways

• Business Asset Disposal Relief applies an 18% capital gains tax rate to qualifying gains up to a £1,000,000 lifetime limit in 2026/27, against a main higher rate of 24%.
• A director must hold at least 5% of the ordinary share capital and 5% of the voting rights of a personal company throughout the two years ending on the date of disposal.
• Since 29 October 2018 a shareholder must also be entitled to at least 5% of distributable profits and 5% of assets on a winding up, or satisfy the alternative test of a 5% entitlement to sale proceeds on a notional sale of the whole company.
• Shares acquired through an Enterprise Management Incentive scheme are exempt from the 5% tests, provided the option was granted at least two years before disposal.
• A dilution election under section 169SC TCGA 1992 lets a shareholder crystallise a gain at the point of a commercial share issue for cash that drops them below 5%, preserving relief on the value built up to that date.
• The £1,000,000 lifetime limit applies per individual, so each spouse or civil partner has their own limit, but the recipient of transferred shares must independently satisfy the shareholding and employment tests for the full two years.

What are the four shareholding limbs a director must satisfy for Business Asset Disposal Relief?

The company must be the shareholder's personal company, which requires four separate conditions to be met simultaneously and continuously for the two years ending on the date of disposal. Those conditions are identical under BADR entrepreneur's relief, which is the same relief renamed in 2020 rather than a separate allowance. Failing to meet all four at any point in that period breaks the qualifying period and restarts the clock.

The first limb is a holding of at least 5% of the ordinary share capital by nominal value, and the second is at least 5% of the voting rights that holding carries. The third and fourth, introduced for disposals on or after 29 October 2018, require entitlement to at least 5% of distributable profits and at least 5% of assets available to equity holders on a winding up.

Directors commonly assume the first limb is the whole test. It is not. A holding of 12% of the issued shares in a class carrying no votes fails the second limb outright, and 8% in a class with no dividend rights fails the third. Economic entitlements are set by the articles of association rather than the share register, which is why the articles need reviewing alongside the cap table.

Trading status is tested for the company as well as the shareholder, and our guide to how a trading company is taxed sets out the company side.

How does the alternative 5% test work for shares with restricted rights?

An alternative test allows a shareholder to qualify where they are entitled to at least 5% of the proceeds on a notional sale of the whole of the company's ordinary share capital at market value on the date of disposal. It was introduced to stop commercially normal share structures from failing the profits and assets limbs.

It matters most where preference shares or investor liquidation preferences exist, which is where business asset disposal relief UK 2026 claims most often break down at diligence. If an investor holds preference shares entitling them to £2,000,000 before ordinary shareholders receive anything, a founder holding 6% of the ordinary shares in a company worth £3,000,000 receives 6% of the residual £1,000,000, which is £60,000, or 2% of the total. That founder fails the alternative test despite a comfortable-looking share percentage.

Growth shares raise the same problem. A hurdle set at current value means the holder receives nothing until the company grows past it, so entitlement to proceeds on a notional sale today can be nil. A shareholder must satisfy either the profits and assets limbs or the alternative test, alongside the share capital and voting requirements in every case. For a complete overview of the relief, including the employment and trading company conditions, see our guide to Business Asset Disposal Relief.

What happens if a funding round dilutes you below 5%?

Dilution below 5% ends the qualifying period from that moment, but a statutory election under sections 169SC to 169SH TCGA 1992 allows a shareholder to treat their shares as sold and reacquired at market value immediately before the new shares are issued. The gain accrued to that date qualifies for relief, and a second election can defer paying the tax until the shares are sold.

The election is available only where the dilution results from a genuine commercial issue of new shares for cash and not as part of tax avoidance arrangements. A bonus issue or share-for-share exchange that dilutes a director does not qualify.

Worked example: Sarah founded a company and held 9% of the ordinary shares. A Series A round in September 2026 reduces her to 3.6%, at which point her shares are worth £480,000 against a base cost of £9,000. Without an election, all £471,000 of gain eventually falls at 24%, giving tax of £113,040. With the election, £471,000 qualifies at the BADR rate of 18%, giving £84,780, and growth after the round is taxed at the main rate, saving £28,260. The election must be made by the first anniversary of 31 January following the tax year of the dilution, so a September 2026 dilution requires an election by 31 January 2029.

Do EMI shares and spouse transfers change the 5% requirement?

Shares acquired on the exercise of an Enterprise Management Incentive option are exempt from the 5% shareholding tests entirely, provided the option was granted at least two years before the disposal and the company was a qualifying trading company throughout. This is the single most valuable exception in the rules and it is why EMI remains the preferred route to extend selling business tax relief to key employees on an exit.

The two-year clock for EMI shares runs from the date of grant, not the date of exercise, so an option granted in 2023 and exercised on completion day in the 2026/27 tax year still qualifies. An option granted eight months before completion does not, whatever the exercise date, which makes late-stage EMI grants worthless for BADR purposes.

Spouse transfers offer no such shortcut. Transferring shares to a spouse before a sale gives access to their separate £1,000,000 lifetime limit, but the recipient must independently satisfy the 5% tests and be an officer or employee of the company for the full two years ending on disposal. A transfer made six months before completion secures nothing. Selling business tax relief planning of this kind has to begin at least two years and one day before the expected exit, the recurring theme across every limb of the BADR entrepreneur's relief conditions.

Frequently Asked Questions

What percentage of shares do I need to own to claim BADR?

You need at least 5% of the ordinary share capital and at least 5% of the voting rights, held throughout the two years ending on the date of disposal. You must also be entitled to at least 5% of distributable profits and 5% of assets on a winding up, or satisfy the alternative test of a 5% entitlement to proceeds on a notional sale of the whole company.

Do non-voting shares qualify for Business Asset Disposal Relief?

No. Non-voting shares fail the requirement to hold at least 5% of a company's voting rights, so they cannot form the basis of a Business Asset Disposal Relief claim on their own, however large the holding. A shareholder holding 20% of the issued share capital entirely in a non-voting class does not have a personal company for BADR purposes.

Can I still claim BADR if a funding round took me below 5%?

Yes, if you make a dilution election under section 169SC TCGA 1992. The election treats your shares as sold and reacquired at market value immediately before the new shares are issued, so the gain built up to that point qualifies for the 18% rate. The dilution must result from a commercial issue of shares for cash.

Do EMI shares need to meet the 5% test?

No. Shares acquired on exercise of an Enterprise Management Incentive option are exempt from the 5% shareholding conditions, provided the option was granted at least two years before the disposal. The two-year period runs from the grant date rather than the exercise date, so options exercised immediately before a sale can still qualify.

How much is BADR actually worth on a share sale?

Business Asset Disposal Relief reduces the capital gains tax rate from 24% to 18% on qualifying gains up to a £1,000,000 lifetime limit in 2026/27, saving 6 percentage points. On a £1,000,000 qualifying gain the relief is worth £60,000 for a higher or additional rate taxpayer, and the £1,000,000 limit applies once across an individual's lifetime.

How Blue Tick Can Help

Blue Tick Accountants reviews share registers, articles of association and shareholders' agreements against every limb of the Business Asset Disposal Relief test, well before a sale process starts, so that dilution elections, spouse transfers and EMI grants happen inside the statutory time limits rather than after them. Where a shareholding currently fails, there is usually a fix available if there are two years to work with. Head to our website and book a meeting now.

Conclusion

The shareholding requirements for Business Asset Disposal Relief are mechanical, unforgiving, and almost always fixable if they are checked early enough. Review the articles of association and the cap table now rather than when a buyer appears, because the two-year qualifying period means most corrective action taken during a sale process arrives too late to help. A director planning an exit within the next three years should treat a shareholding review as the first step, not a due diligence formality.

About the Author

This guide was written by Leon, founder of Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice that helps limited company owners, landlords and the self-employed across the UK. It was last reviewed for the 2026/27 tax year.

This article is intended for general informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are subject to change and their application will depend on your individual circumstances. You should always seek advice from a qualified professional before taking action. Blue Tick Accountants accepts no liability for decisions made on the basis of this content.