Business Asset Disposal Relief (BADR): What Employers and Employees Need to Know About Share Options

This article offers a straightforward guide for companies and employees to understand how BADR works, especially in relation to Enterprise Management Incentive (EMI) and Unapproved Share Options, and what steps need to be taken to ensure eligibility.

What is Business Asset Disposal Relief (BADR)?

BADR is a tax relief that allows individuals to pay a reduced rate of Capital Gains Tax (CGT) on the sale of qualifying business assets, including company shares. The relief can be applied to up to £1 million of lifetime gains.

CGT Rates for BADR

What Conditions Must the Company Meet for BADR to Apply?

Whether shares come from EMI or unapproved options, BADR is only available if the company itself meets certain criteria. These include:

Trading Status

• The company must be a trading company or the holding company of a trading group.
• A trading company is one that carries out substantial trading activities and does not consist primarily of non-trading activities (like investment holdings or property rental).

Active Trading Period

• The company must be a qualifying trading company for at least 2 years before the share disposal.

UK Permanent Establishment (for EMI)

• If EMI options are granted, the company must have a permanent establishment in the UK at the time of the option grant.

Not in Liquidation

• BADR is not usually available if the company has ceased trading and entered liquidation, unless the disposal takes place within 3 years of trading ceasing.

Companies that fail to meet these requirements could inadvertently disqualify employees from BADR even if the individual conditions are met.

BADR and EMI (Enterprise Management Incentive) Options

EMI share options are particularly attractive when it comes to BADR, as they make it significantly easier to meet the qualifying conditions.

To qualify for BADR on EMI shares, the individual must:

• Have held the EMI option for at least 2 years before the shares are sold. The 2-year period begins on the date the option is granted, not when the shares are exercised.
• Be an employee or director of the company throughout this period.
• No minimum shareholding is required.

Employer Responsibilities

• Grant EMI options in line with the scheme rules.
• Notify HMRC of EMI grants by 6 July following the tax year of the grant.
• Keep records showing the company’s trading status and employee eligibility.

BADR and Unapproved Share Options

Unapproved options are more complex and often don’t qualify for BADR unless the employee is also a significant shareholder.

To qualify for BADR on shares from unapproved options, the individual must:

• Hold at least 5% of the company’s shares and voting rights.
• Be entitled to 5% of profits or sale proceeds.
• Hold the shares for at least 2 years before selling.
• Be an employee or director throughout that period.
• The company must meet the same trading conditions as required for EMI/BADR.

Comparison: EMI vs. Unapproved Options and BADR Eligibility