Planning and sales
Demergers and Business Asset Disposal Relief
A demerger can protect or put at risk Business Asset Disposal Relief on a later sale. Holding periods, trading status and separating investment assets.
Business Asset Disposal Relief (BADR) is often part of the reason owners look at a demerger. If a trading company also holds property or investments, the relief on a future sale can be at risk. Separating those assets can help. But a demerger also changes which company you own, and BADR looks closely at the company whose shares you eventually sell.
This article explains how the two interact, and what to check before you start.
BADR in brief
For disposals on or after 6 April 2026:
- Rate: 18% on qualifying gains (14% in 2025/26, 10% before 6 April 2025).
- Lifetime limit: £1m of qualifying gains per person.
- Normal CGT rates above the limit: 18% within the basic rate band, 24% above.
- Maximum saving against the 24% rate: £60,000 per person.
For a share sale, the main conditions must be met throughout the two years before the sale:
| Condition | What it means |
|---|---|
| Trading company | The company is a trading company, or the holding company of a trading group |
| Officer or employee | You are an officer or employee of the company or a group company |
| 5% shares and votes | At least 5% of ordinary share capital and voting rights |
| 5% economic interest | At least 5% entitlement to profits and to assets on a winding up (or to sale proceeds) |
The claim must be made by the first anniversary of 31 January following the tax year of the sale.
What is at stake: an illustration
Take a shareholder who is a higher rate taxpayer and makes a £1m gain on selling shares in the 2026/27 tax year, ignoring the annual exempt amount.
| Without BADR | With BADR | |
|---|---|---|
| Rate | 24% | 18% |
| Tax on £1m gain | £240,000 | £180,000 |
| Difference | £60,000 |
That difference is per person, so with two or three qualifying shareholders the total can be significant. It is also the most BADR can save any one person over their lifetime at current rates. So BADR is a good reason to keep a trading company clean, but rarely a reason on its own to carry out a demerger. The commercial reasons for separating the businesses need to stand up in their own right, both for the shareholders and for HMRC.
Where a demerger helps: trading status
The trading company test is where property and investments cause trouble. A company qualifies as trading if its activities don't include non-trading activities to a substantial extent. HMRC treats 20% as an indicator, looking at measures such as non-trading income, the asset base, expenses and management time.
A trading company that has built up let property, surplus cash invested for return, or a portfolio of investments can drift past that line without anyone noticing. If it does, BADR may not be available on a sale.
A demerger can move those assets into a separate company owned by the same shareholders. The trading company is left with its trade, which makes the trading status test easier to meet going forward. See separating property from a trading company.
The two-year point
BADR looks at the whole two years before the sale. A demerger fixes the position from the date it happens. It doesn't change the past. So:
- a demerger well before a sale can mean the company meets the test for the full two years
- a demerger shortly before a sale may leave the earlier part of the period exposed
That is one of several reasons why demerging before a sale works best when it is started early.
Where a demerger can cause problems
1. A new company, a new history
Where reorganisation reliefs apply, your new shares are generally treated as the same asset as your old ones (section 127 TCGA 1992). That helps with your period of ownership.
But the company conditions are applied to the company whose shares you sell. HMRC's guidance indicates that the BADR conditions are applied to that company. If the company you eventually sell was formed as part of the demerger, its trading history and your role in it may be shorter than two years at the date of sale. There is an express look-back rule for EMI shares, but no general equivalent for ordinary shares has been confirmed. This is an area for specific advice on the facts.
2. Officer or employee in the right company
After a demerger, shareholders often focus on different businesses. A shareholder who works only in the property side may not be an officer or employee of the trading company. If they later sell trading company shares, that can affect their BADR.
3. Shareholdings that change in a partition
In a partition, shareholders end up with different businesses. Each shareholder's percentage in each company changes, sometimes to 0% or 100%. Each person should check they will meet the 5% tests in the company they will sell.
4. The property company itself
A company mainly holding let property is an investment company. Shares in it generally won't qualify for BADR, and gains on a later sale of that company would usually be taxed at normal rates. That is often fine, because the property company is held for income or the long term. But it should be understood from the start.
Locking in BADR: the section 169Q election
Sometimes the concern is the other way round. The old company qualifies for BADR now, but the new structure may not on a later sale. Section 169Q TCGA 1992 allows an election to treat the reorganisation as a disposal, so that BADR can be claimed on the gain to date.
Points to weigh:
- it means paying tax now on a gain that would otherwise be deferred
- the election applies to all the shares in the reorganisation
- the deadline is the first anniversary of 31 January following the tax year
- it uses part of the £1m lifetime limit
It is useful in some cases, but it is not a default step.
Inheritance tax: the other side of the coin
Separating property can improve BADR, but it can have the opposite effect on inheritance tax. Business Relief is not available on shares in a company whose business is mainly making or holding investments. From 6 April 2026, 100% Business Relief applies to the first £2.5m of combined qualifying business and agricultural property per person, with 50% above that. Moving property into its own company will usually take it outside Business Relief altogether. Owners thinking about succession should look at both reliefs together. See family succession demergers.
A BADR checklist before a demerger
- Is the current company's trading status at risk from property, cash or investments?
- When is a sale realistically likely: within two years, or later?
- Which company will each shareholder eventually sell?
- Will each shareholder be an officer or employee of that company?
- Will each shareholder meet the 5% tests in that company?
- Is a section 169Q election worth modelling?
- What is the inheritance tax effect of separating investment assets?
BADR is one relief among several affected by a demerger. Route choice depends on the facts, the reliefs have conditions and anti-avoidance rules, and clearance is usually sought first. We handle the whole process, and the order of the steps is where we add most value.
This article is general information, not advice. Tax rules change and their effect depends on your circumstances. Please speak to us before acting.
