Trading or not? Why income nature matters for BADR

Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, offers business owners a reduced Capital Gains Tax (CGT) rate on disposals of shares or assets in a trading business.

Trading is the key word here. A recent tax tribunal involving Chelsea Yacht & Boat Company has highlighted the risks of misunderstanding what counts as trading income.

The owners tried to claim BADR after selling their shares. HM Revenue & Customs (HMRC) refused, arguing that mooring income was not trading, but a right over land, and the tribunal agreed.

The result? No BADR relief.

What counts as trading?

BADR only applies where the business is genuinely trading.

If income comes from passive sources such as rents, land rights or licences, HMRC may view the company as non-trading, making you ineligible for the relief.

In the Chelsea Yacht case, the business owners believed their income from mooring boats was part of a trading activity.

HMRC saw it differently, they argued it was simply exploiting land rights. The tribunal sided with HMRC, a costly outcome.

Why this is a growing risk for business owners

Several factors mean more owners could face this kind of problem:

• Many businesses have mixed income streams (property plus services, assets plus rights).
• HMRC is applying more scrutiny to BADR claims, especially where the business includes property or land-related income.
• BADR rates are changing, prompting more owners to accelerate exit plans, and more HMRC enquiries in response.

The clock is ticking on BADR rates

As of April 2025, the BADR rate rose to 14 per cent. In April 2026, the rate will increase again to 18 per cent.

This is driving a wave of disposals. Voluntary liquidations hit record highs ahead of April 2025, but the risk of getting caught out is rising too.

If you misjudge whether your income is truly trading, you could face a much bigger tax bill than expected.

How to protect your claim

• Review your income streams – Are you generating active, trading income, or passive income linked to land or property?
• Segment your accounts. Keep clear records of trading and non-trading income.
• Get written advice – Documented professional advice gives you stronger protection if HMRC reviews your return.
• Be realistic on valuations. If you are selling a business with land-linked income, prepare for HMRC scrutiny.
• Act before April 2026. If you are planning to sell, do not delay. The current 14 per cent rate won’t last long.

The Chelsea Yacht case is a warning to all business owners that what you think counts as trading income and what HMRC will accept can differ.

If you are considering a sale, restructuring your business, or planning retirement, get advice early.

The sooner you review your income streams, the better your chance of securing the right tax treatment and avoiding nasty surprises later.

Our team of accountants and tax experts can help you with the sale of your business and making sure it is structured in the most tax-efficient way. Contact us today.