Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief before April 2020, is a UK tax relief designed to encourage entrepreneurship by reducing the capital gains tax (CGT) payable on the disposal of qualifying business assets. This relief is particularly significant for business owners, partners, and shareholders, as it can lead to substantial tax savings, facilitating more reinvestment or making retirement more financially comfortable.
The Essentials of Business Asset Disposal Relief
BADR applies to disposals of business assets, which can include parts or all of a business, shares in a personal company, and assets lent to the business. The key benefit of BADR is the reduction of the CGT rate to 10% on qualifying disposals, with a lifetime limit of £1 million per individual. This is significantly lower than the standard CGT rates of 20% for higher rate taxpayers, making it an appealing option for those looking to sell their business assets.
Eligibility Criteria
To qualify for BADR, several criteria must be met. These include:
- Type of Asset: The relief applies to the disposal of all or part of a business, shares in a personal company, or assets used in a business by the seller.
- Duration of Ownership: The assets must have been owned by the individual for at least two years prior to the disposal.
- Business Participation: The individual claiming relief must have been an employee or officer of the company, or a partner in the business, during the time they owned the assets.
- Personal Company Conditions: If the disposal involves shares or securities, the company must qualify as the individual’s personal company. This means the individual must hold at least 5% of both the shares and voting rights in the company.
- Trading Company Test: The company must be a trading company or the holding company of a trading group. This involves a consideration of the company’s activities, which must primarily include trading rather than investment activities.
How BADR is Claimed
Claiming BADR involves including the relief on your Self Assessment tax return for the year in which the disposal occurred. It is important to keep detailed records of the disposal and ensure that all conditions for relief are met. Typically, the process requires a thorough documentation of business ownership, the assets disposed of, and the structure of the transaction.
Practical Examples
Consider a business owner who decides to retire and sell their business which they have owned and operated for 10 years. If the sale price is £1.2 million and the base cost of the business (the amount initially invested) was £200,000, the capital gain would be £1 million. Without BADR, assuming a CGT rate of 20%, the CGT liability would be £200,000. With BADR, the CGT liability reduces to £100,000 (10% of £1 million), saving the business owner £100,000.
Another scenario could involve a shareholder who owns 10% of a trading company and decides to sell their shares after owning them for three years. If the shares are sold for £500,000, and the original cost was £100,000, the gain of £400,000 would potentially be taxed at 20%. However, with BADR, the CGT rate would drop to 10%, halving the tax bill to £40,000 and resulting in a saving of the same amount.
Impact of the Lifetime Limit Reduction
The April 2020 reduction of the lifetime limit from £10 million to £1 million has implications for business owners planning for retirement or looking to sell multiple assets over time. It is crucial for business owners to strategise their disposals and understand how the limit applies across different assets and over time.
Planning for BADR
Effective planning is key to maximising the benefits of BADR. Business owners should consider the timing of disposals, the structure of their business, and their future plans for reinvestment or retirement. Consulting with tax professionals can provide strategic insights and ensure compliance with all eligibility requirements.
Business Asset Disposal Relief remains a vital tool for UK business owners, offering significant tax advantages that can aid in the transition phases of business ownership. While the recent changes to the lifetime limit may affect long-term planning, the relief still provides a valuable opportunity to reduce tax liabilities during crucial business transitions. Understanding and utilising BADR effectively can lead to substantial financial benefits and support the continued growth and adaptation of entrepreneurial ventures in the UK.
Here at Double Point we understand the complexities involved in Business Asset Disposal Relief and the significant impact it can have on your financial planning. Our team of dedicated professionals is ready to assist you with any queries related to BADR. You can set up a free consultation with us to explore how we can help you maximise the benefits of this relief.
