Demergers and Business Asset Disposal Relief: What to Check Before You Start

Many owners look at a demerger because of Business Asset Disposal Relief (BADR). If a trading company also holds property or investments, the relief on a future sale may be in doubt, and moving those assets out can help. But a demerger also changes which company you own, and BADR examines the company whose shares you eventually sell.

The relief in outline

For disposals on or after 6 April 2026, BADR taxes qualifying gains at 18%. The rate was 14% in 2025/26 and 10% before 6 April 2025. The lifetime limit is £1m of qualifying gains per person. Gains above the limit fall back to normal CGT rates of 18% within the basic rate band and 24% above it. Against the 24% rate, the most BADR can save one person is £60,000.

For a share sale, the following must be true throughout the two years before the sale:

The claim must be made by the first anniversary of 31 January after the end of the tax year of the sale.

Take a higher rate taxpayer with a £1m gain in 2026/27, ignoring the annual exempt amount. Without BADR the tax is £240,000 at 24%. With BADR it is £180,000 at 18%. The difference is £60,000 per person. That is a worthwhile saving, but rarely a good enough reason to demerge on its own. The commercial case for separating the businesses has to stand up independently.

Where a demerger helps: trading status

A company counts as trading if its activities do not include non-trading activities to a substantial extent. HMRC treats 20% as an indicator, looking at income, assets, expenses and management time. A trading company that has gathered let property, surplus cash invested for a return, or a portfolio of investments can drift beyond that line without anyone noticing, and BADR may then be lost.

A demerger can place those assets in a separate company held by the same shareholders. The trading company is left with its trade, so the test is easier to meet from then on.

The two-year catch

BADR looks at the whole two years before the sale. A demerger fixes the position from the date it happens and does not rewrite the past. A demerger well ahead of a sale can mean the company passes the test for the full period. One carried out shortly before a sale may leave the earlier part exposed. This is one reason such work should start early.

Where a demerger can cause difficulty

A new company with a short history. Where reorganisation reliefs apply, new shares are generally treated as the same asset as the old ones under section 127 TCGA 1992, which helps with the holding period. But the company conditions are tested on the company whose shares you sell. If that company was formed as part of the demerger, its trading history, and your role in it, may be under 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, so this needs advice on the facts.

Being an officer or employee of the right company. After a demerger, shareholders often concentrate on one business. Someone who works only on the property side may not be an officer or employee of the trading company, which can affect their relief if they later sell its shares.

Changing percentages in a partition. Where shareholders take different businesses, each person's percentage in each company changes, sometimes to 0% or 100%. Each should confirm they will meet the 5% tests in the company they will sell.

The property company. A company mainly holding let property is an investment company. Its shares will not normally qualify for BADR, and a later sale would usually be taxed at normal rates. That is often acceptable, because such a company is held for income or long term, but it should be understood from the start.

Locking in relief: the section 169Q election

Sometimes the worry runs the other way: the old company qualifies now, but the new structure may not later. Section 169Q TCGA 1992 lets you elect to treat the reorganisation as a disposal, so BADR can be claimed on the gain to date. Points to weigh:

• you pay 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 after the tax year
• it uses part of your £1m lifetime limit

It helps in some cases but is not a default step.

The inheritance tax side

Separating property can help BADR and hurt 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, and 50% above that. Moving property into its own company will usually take it outside the relief. Owners considering succession should look at both reliefs together.

A checklist before you begin

• Is trading status at risk from property, cash or investments?
• Is a sale likely within two years, or later?
• Which company will each shareholder eventually sell?
• Will each shareholder be an officer or employee of it?
• Will each meet the 5% tests?
• Is a section 169Q election worth modelling?
• What is the inheritance tax effect of separating investment assets?

BADR is one of several reliefs a demerger touches, and each carries conditions and anti-avoidance rules. Advice from our specialist team is reviewed by a Chartered Tax Adviser. To look at your own position, book a call with our team, or read about the capital reduction demerger.

This article is general information, not advice. Tax rules change and their effect depends on your circumstances. Please speak to us before acting.

For more on how demergers work in practice, see our specialist demerger practice, Demerger Tax.