If you own a marketing agency, digital agency, or creative agency and you are thinking about selling your shares, Business Asset Disposal Relief (BADR) is probably the single most valuable tax relief you will ever use.
BADR reduces your Capital Gains Tax (CGT) rate from 20% to 14% on the first £1m of lifetime gains. For an agency founder selling shares worth £800,000, that is a saving of £80,000 compared to the standard rate. On a full £1 million gain, you save £100,000.
But here is the problem. HMRC does not hand this relief out easily. The conditions are specific, and agency founders regularly lose BADR because they missed one detail. A share structure change six months before sale. A period of non-compliance on payroll. A director role that was not formally documented.
To qualify BADR selling agency shares, you must meet all five conditions below. This article walks through each one with the practical steps you need to take, the traps to avoid, and the timing you should be thinking about now.
What is Business Asset Disposal Relief?
BADR replaced Entrepreneurs' Relief in April 2020. The name changed. The rules stayed largely the same.
It allows you to pay 10% CGT on qualifying gains from selling shares in your personal trading company, up to a lifetime limit of £1 million. Any gain above £1 million is taxed at 20% (or 24% for carried interest, but that rarely applies to agency founders).
The relief applies to shares, not the assets of the business. If you sell the company's assets rather than its shares, BADR does not apply. That is a common mistake in agency sales where the buyer wants to buy assets to avoid inheriting liabilities. If you go down that route, you pay 20% on the gain. Always structure an agency sale as a share sale if you want the relief.
The Five Conditions to Qualify BADR Selling Agency Shares
These conditions must be met throughout the 12 months ending with the date of disposal (or 24 months for disposals before 6 April 2025 under the old rules, but we are now in the new regime).
1. You Must Be a Director or Employee of the Agency
This sounds straightforward, but it trips people up.
You need to be an officer or employee of the company. A director counts. So does a company secretary. So does an employee with a formal contract.
What does not count? Being a shareholder only. If you stepped back from day-to-day operations six months before the sale and stopped drawing a salary, you might not meet this condition. HMRC looks at whether you held a formal position and performed duties under that position.
If you are a non-executive director, that typically counts. But check your appointment letter. If it says "adviser" rather than "director", you have a problem.
For agency founders who have moved to a holding company structure, be careful. You need to be a director or employee of the trading company whose shares you are selling, not just the holding company. If your shares are in the holding company, the conditions still apply to the trading subsidiary.
2. You Must Hold at Least 5% of the Ordinary Share Capital
This is the 5% test. You need to own 5% or more of the ordinary share capital and be entitled to 5% or more of:
- Profits available for distribution
- Assets on a winding up
- Proceeds on a sale of the company
If you have multiple share classes, this gets complicated. Preference shares, alphabet shares, and growth shares all need careful analysis. A founder who holds 5% of the voting shares but only 3% of the economic rights might fail this test.
Also check your co-founder agreements. If you have a drag-along or tag-along that reduces your effective entitlement, it could affect your 5% calculation.
3. The 5% Holding Must Be Held for at Least 2 Years
You need to have held the shares for two years before the date of disposal. This is straightforward if you founded the agency ten years ago. It is less straightforward if you acquired additional shares recently or restructured the share capital.
If you sold some shares to a new investor and then bought more shares back, the two-year clock resets on those new shares. You cannot just take the average holding period. Each tranche of shares is assessed separately.
For agency founders who incorporated late (started as a sole trader and then incorporated), the two-year period starts from incorporation, not from when you started trading. Trading history as a sole trader does not count toward the two years.
4. The Agency Must Be a Trading Company
This is where many agency founders get caught out.
BADR only applies to trading companies. An agency that provides marketing, creative, PR, digital, or recruitment services is almost certainly trading. But as you grow, you might accumulate cash, investments, or property that pushes you into "non-trading" territory.
HMRC's test is whether the company's activities are wholly or mainly trading activities. If more than 20% of your income comes from non-trading sources (investment income, rental income, interest on large cash deposits), you risk losing trading status.
An agency with £500,000 in the bank earning 5% interest generates £25,000 in investment income. If your trading profit is £100,000, that interest is 20% of your total income. You are right on the borderline.
If you have a subsidiary that holds property or investments separately from the trading business, that subsidiary is not a trading company. You cannot claim BADR on shares in a non-trading subsidiary.
5. The Agency Must Be Your Personal Company
This condition ties back to the 5% test. The company must be your personal company, meaning you hold at least 5% of the shares and voting rights. If you hold shares through a trust or a nominee, you need to check the beneficial ownership rules carefully.
For agency founders who have brought in external investors and diluted below 5%, BADR is lost. You cannot claim it on a 4.9% holding. There is no taper or partial relief. You either meet the 5% threshold or you do not.
The 12-Month Testing Period: What Changed in 2025
Before 6 April 2025, you had to meet all conditions for 24 months before disposal. From 6 April 2025, that reduced to 12 months. This is a significant improvement for agency founders planning an exit.
But the 12-month period must be continuous. If you drop below 5% for any reason during that period, the clock resets. If you resign as a director and then rejoin two months later, the 12-month period starts again from the date you rejoin.
Plan your exit timeline carefully. If you want to sell in June 2027, make sure you have been a director or employee holding 5% continuously since at least June 2026.
Common Traps That Cost Agency Founders the Relief
Here are the situations I see most often in my ICAEW qualified practice:
Share Restructuring Before Sale
You want to bring in a new co-founder six months before sale and issue them shares. You dilute your own holding from 60% to 40%. That is fine for the 5% test. But if you also change the share classes or create new rights, you might trigger a disposal of your original shares for CGT purposes. That could crystallise a gain you did not expect.
Moving to a Holding Company Structure
Many agency founders set up a holding company to own multiple agencies or to ring-fence cash. If you transfer your shares into a holding company in exchange for new shares, that is a share-for-share exchange. It can be done without triggering a CGT charge, but the two-year holding period resets on the new holding company shares.
If you did this 18 months before sale, you do not qualify for BADR. You need to wait two years from the date of the exchange.
Accumulating Too Much Cash
As noted above, large cash balances generate investment income. If that investment income exceeds 20% of your total income, the company is no longer a trading company for BADR purposes.
The solution is to extract excess cash before sale. Pay dividends. Buy back shares. Invest in growth. Just do not leave it sitting in the bank account earning interest.
Not Being Formally Appointed as Director
If you are the founder and you run the business, you might think you are a director. But if you were never formally appointed at Companies House and you do not have a service agreement, HMRC may argue you are not a director or employee.
Check your Companies House filing. If you are not listed as a director, fix it now. It takes 15 minutes online.
How to Prepare for a BADR-Qualifying Sale
If you are planning to sell your agency shares within the next three years, here is what to do now:
- Review your share structure. Make sure you hold at least 5% of ordinary shares and economic rights. If you have alphabet shares, get a professional review of the rights attached to each class.
- Confirm your director or employee status. Check Companies House. Check your service agreement. If you are not formally appointed, do it today.
- Assess the company's trading status. Look at your last three years of income. What percentage came from trading activities? If investment income is creeping up, address it.
- Plan the timing. Work backwards from your target sale date. You need 12 continuous months of qualifying conditions before disposal. Do not start the sale process until you are certain you meet the conditions.
- Document everything. Keep board minutes, share certificates, director appointment letters, and payroll records. If HMRC challenges your BADR claim, you need to prove you met the conditions.
What Happens If You Miss the Conditions
If you fail to meet even one condition, BADR is lost entirely. There is no partial relief. You pay 20% CGT on the full gain.
For a £1 million gain, that is the difference between paying £100,000 and paying £200,000. That £100,000 difference is worth planning around.
You can claim BADR on multiple disposals over your lifetime, up to the £1 million limit. If you sell shares in stages, you can use the relief on each disposal until you hit the cap.
When to Speak to an Accountant
If you are within 24 months of a potential sale, speak to an accountant now. Do not wait until you have an offer. The conditions take time to fix. A share restructuring, a director appointment, or a cash extraction all need to happen before the 12-month qualifying period starts.
As ICAEW qualified accountants working exclusively with agency founders, we see these situations regularly. The difference between a qualifying and a non-qualifying sale is often a simple piece of paperwork done at the right time.
If your share structure has changed in the last two years, or if you have accumulated significant cash in the business, ask your accountant before you start the sale process. A 30-minute review could save you six figures in tax.
For more on exit planning, see our Growth and Exit articles. If you are unsure about your current structure, contact us for a review of your BADR eligibility.