If you're a contractor thinking about closing your limited company, Business Asset Disposal Relief (BADR) can make a big difference to how much tax you'll pay to HMRC.
Lifting the lid on how BADR works, is changing, catches contractors out…
But with rate changes from April 2026 and HMRC paying closer attention to BADR claims, it's worth knowing exactly how BADR works, and the common mistakes that can catch contractors out.
Before I continue with this guide, exclusively for ContractorUK, writes Richard Hunt, a licensed insolvency practitioner at the Liquidation Centre, here's an important note:
This guide is for general information only and should not be treated as tax advice. Limited company contractors should speak to an accountant for advice on their specific situation.
What is BADR? And what is Business Asset Disposal Relief's origin?
BADR was formerly known as Entrepreneurs' Relief (effective since April 2008), and it was introduced as a way to recognise the effort and risk involved in running your own company.
BADR is tax relief that lets you pay a lower rate of Capital Gains Tax (CGT) when you sell or close a company and dispose of qualifying business assets.
The scheme was renamed to Business Asset Disposal Relief in March 2020, and at the same time, the lifetime limit (the most profit you can obtain the tax relief on) was cut from £10 million to £1 million. And that £1million ceiling still applies today (2025/26).
What are the current and future CGT rates if closing a company with BADR?
Currently, if you were to use BADR, eligible gains are taxed at 14%, up from 10% in April 2025.
However, as announced at Autumn Budget 2024, this CGT rate of 14% is set to rise — again — to 18% from April 2026.
For contractors who've built up profits in their company, waiting until after April 2026 could add thousands of pounds to your tax bill, so timing matters.
BADR: Common contractor mistakes
1. Restarting too soon
One common mistake when contractors close their own company using BADR is starting a new company, doing similar work, too soon after a distribution.
If you start trading within two years, HMRC could see it as a continuation of your old business.
If you have questions about this condition, it's best to speak to your accountant about your individual situation for advice.
2. Leaving it too late to meet the April 2026 deadline
The main, formal procedure if you want to use BADR to close your company is an MVL (Members' Voluntary Liquidation), but the MVL process can take a while, and the timing will be different for each business.
Contractors shouldn't underestimate how long it might take for steps like getting final accounts prepared by their accountant or waiting for clearance from HMRC.
If a business wanted to complete a capital distribution before April 5th 2026, the process would need to start well in advance. For example, final accounts may need to be ready by early March 2026, and the case appointed by mid-to-late March to allow enough time for distribution within the tax year. Missing these deadlines could mean paying a CGT rate of 18% (effective post-April 2026) instead of 14% on the qualifying gains.
3. Not meeting the qualifying conditions
To claim BADR, the business must be a 'personal company', and you must have owned at least 5% of the company's shares and voting rights for at least two years before liquidation.
The company must also have been actively trading rather than holding investments. Many BADR claims fail because the business held too much cash or stopped trading too early.
Can an insolvency practitioner help ensure my contractor BADR claim succeeds?
Yes, absolutely!
The rules around BADR and company closures can be complicated, and any mistakes in applying could lead to HMRC checks or even a penalty. An insolvency practitioner can guide you through the process and handle communications with HMRC.
That said, contractors will need to speak to their accountant for tax advice, as only an accountant will be able to explain how the rules apply to their specific situation.
If you're hoping to close your business before April 2026, having expert support can reduce the risk of delays and help make sure the process runs smoothly.
Using a qualified insolvency practitioner (IP), who specialises in one-person contractor companies, can be particularly helpful, as they understand the specific challenges contractors face. They can also guide you through each step while your accountant handles any tax advice.
Preparing a BADR claim: the order of steps to take to close your company
If you're considering closing your company and want to take advantage of the current BADR rate before it changes in April 2026, it's best to start planning and getting your affairs in order as soon as possible.
Start by talking to your accountant about your plans and asking them to begin finalising your accounts, as they'll be able to advise you on how BADR (and other tax rules) apply to your situation.
To make sure your case is formally appointed on time without delays, you can then contact a liquidation company and check that you meet all the qualifying conditions.
TL;DR: Directors, beware BADR if closing between now and April 2026
Getting trusted information about closing your company tax-efficiently while leaving yourself enough time will give you the best chance of completing the BADR and MVL processes before April and avoiding any unexpected tax issues.
This guide is ahead of a second article for ContractorUK from us at the Liquidation Centre, which will explore the April 2026 BADR changes in greater detail, and share the practicalities on what contractors should do to prepare. If you're unsure about timings or how the CGT rate increase could affect you, get in touch and we'll be happy to talk you through the process.
