The situation
A seven-person creative agency based in Bristol Harbourside, specialising in brand strategy and visual identity for B2B tech companies. The agency had been trading for nine years, with a solid reputation and a loyal client base that included three long-term retainers. Revenue had grown steadily to £1.2m in the last financial year, with net profits of £210,000. The two founding directors, both in their early 40s, owned 60% and 40% of the shares respectively. They had built the business from scratch, working from a shared desk in a co-working space to a leasehold studio overlooking the water.
The founders had received an unsolicited offer from a mid-sized international agency group looking to expand its UK footprint. The offer was for 100% of the shares, with a total consideration of £1.8m, structured as £1.4m cash on completion and £400,000 in earn-out over two years. The deal was attractive, but the founders were worried about the tax bill. They had never taken formal advice on exit planning and had always assumed they would simply sell their shares and pay Capital Gains Tax at the standard rate.
The decision
The founders came to us with a straightforward question: "How much tax will we pay, and is there anything we can do about it?" They had heard about Business Asset Disposal Relief (BADR) but didn't know if they qualified, or what steps they needed to take. The offer had been made in early March 2025, and the buyer wanted to complete by the end of June 2026. That gave us roughly 14 months to restructure the business in a way that would maximise the available reliefs.
We ran an initial diagnostic. The agency was trading as a limited company, with the shares held directly by the two founders. Both had been directors and employees for the full nine years. The business met the trading condition for BADR, over 80% of its income came from qualifying trading activities. The problem was that the company had accumulated a significant cash reserve of £280,000, built up over the years from retained profits. That cash was sitting in a business bank account, earning minimal interest. Under BADR rules, if a company has more than 20% of its assets as non-trading (i.e. cash or investments), the relief can be restricted. In this case, the cash represented roughly 22% of total assets, just over the threshold.
What we modelled
We built three scenarios in our financial model, using real numbers from the agency's management accounts and tax returns.
Scenario A: Do nothing. Sell the shares as-is. The total gain would be £1.8m minus the original subscription cost of £2,000 (negligible). Each founder would pay CGT at 24% (the higher rate for 2025/26) on their share of the gain. Total tax: approximately £432,000. That was the baseline.
Scenario B: Restructure to qualify for BADR. This meant reducing the non-trading cash to below 20% of total assets, and ensuring both founders held their shares for at least two years before the sale. The two-year holding period was already met, they had held shares since incorporation. The cash issue was the main blocker. We modelled two sub-options:
- Option B1: Pay out the excess cash as dividends before the sale. This would reduce the cash reserve to £180,000, bringing non-trading assets to 18% of the total. The dividends would be taxed at the shareholders' marginal dividend rates (8.75% for basic rate, 33.75% for higher rate, 39.35% for additional rate). For the two founders, both higher-rate taxpayers, the tax on a £100,000 dividend would be £33,750 each. Total dividend tax: £67,500. But the gain on the sale would then qualify for BADR at 14% on the first £1m of gains per person. Total CGT: £252,000. Combined tax: £319,500.
- Option B2: Invest the excess cash into qualifying business assets, new equipment, software, or a pension contribution for the directors. This would convert non-trading cash into trading assets, keeping the balance sheet clean. We modelled a £100,000 investment in new Mac workstations, a server upgrade, and a contribution to a director's SIPP. This would reduce the cash to £180,000, achieving the same 18% ratio. No dividend tax, but the investment would reduce the company's net assets slightly. Total CGT: £252,000. No additional tax on the investment.
Scenario C: Partial claim. If the cash couldn't be fully addressed, we could claim BADR on the trading element of the gain only. This would be messy and likely challenged by HMRC. We advised against it.
The outcome
The founders chose Option B2. They invested £100,000 into new equipment (Macs, monitors, a server, and a high-end colour calibration system) and contributed £40,000 into a SIPP for one director who had low pension savings. The remaining £40,000 was used to pay down a small director's loan account, further cleaning the balance sheet. The restructuring was completed by August 2025, well within the 14-month window.
The sale completed in June 2026 as planned. Each founder claimed BADR on their share of the gain, paying 14% on the first £1m and 24% on the remainder. Total CGT bill: £252,000. Compared to the baseline of £432,000, they saved £180,000 in tax. After accounting for the £40,000 pension contribution (which reduced corporation tax by £7,600 at 19%), the net saving was approximately £187,600. But the headline figure they cared about was the £43,000 each saved on their personal tax bill, a combined £86,000 reduction in CGT.
The agency continued to trade under the new ownership, with the founders staying on as creative directors for the earn-out period. The new equipment and pension contribution were seen as sensible investments that also served the business post-sale.
What others can learn
- Check your balance sheet early. BADR is generous, but the 20% non-trading asset rule catches many agency owners who have built up cash reserves. If you're planning an exit, review your balance sheet at least 18 months before the sale. A simple dividend or investment can fix the ratio.
- Pension contributions are a double win. Paying into a director's SIPP reduces corporation tax, lowers non-trading assets, and builds retirement savings. It's one of the most tax-efficient ways to clean up a balance sheet before a sale.
- Don't assume you qualify automatically. Even if you've held shares for two years and the business is trading, small details like cash levels or a property held in the company can disqualify you. Always get a formal review before signing a heads of terms.
- Timing is everything. The restructuring must be completed at least two years before the sale (for shares held at that point) and the non-trading asset test must be met at the time of sale. Starting 14 months out gave this agency enough time to act without rushing.
- Earn-out structures need care. The £400,000 earn-out in this deal was structured as deferred consideration, not as employment income. That meant it qualified for BADR too, as long as the shares were held for the earn-out period. If the earn-out had been structured as a consultancy fee, it would have been taxed as income at 45%. Always negotiate the earn-out structure with tax in mind.