Understanding Business Asset Disposal Relief: A Comprehensive Guide
Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, is a significant tax relief mechanism available in the United Kingdom, designed to incentivise business owners by reducing the amount of Capital Gains Tax (CGT) they need to pay when they dispose of certain business assets.
In this article, we’ll take an in-depth look at BADR, how it works, its eligibility criteria, and its implications for business owners.
What is Business Asset Disposal Relief?
Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, is a tax break offered by the UK government to incentivise business ownership and investment. You can determine your eligibility for BADR on the gov.co.uk website.
It applies to capital gains tax (CGT) when you sell (dispose of) all or part of your business.
Key Features of BADR
- Reduced Tax Rate: Qualifying disposals are taxed at 10% CGT, a significant reduction from the standard rate.
- Lifetime Limit: There is a lifetime limit on the gains that can qualify for BADR. As of the 2024/25 tax year, this limit is £1 million.
- Eligible Gains: The relief can be applied to the sale of business assets, shares in a company, and certain other qualifying disposals.
Eligibility Criteria
To benefit from business asset disposal relief, specific conditions must be met:
Ownership and Involvement
- You must be a sole trader, partner, or shareholder in a trading company.
- You must have owned the business or shares for at least two years, known as the ‘qualifying period’.
- If you’re a shareholder, you must own at least 5% of the total shares and voting rights for a minimum of two years.
- You must have been an employee or office holder (such as a director) for at least two years before the sale.
- If you’re disposing of shares from an Enterprise Management Incentive (EMI), the shares must have been bought after 5 April 2013 and you must have physically held the EMI shares for at least two years.
- If the shares are not from an EMI, the business must be your ‘personal company’ for at least two years before the shares are sold, and you must hold both 5% of the shares and 5% of the voting rights.
- The relief is only available to individuals, not companies, and can only be used for qualified disposals of business assets, not investment assets.
Qualifying Business Assets
The relief applies to the sale of various business assets, including:
- Shares in a Personal Company: The company must be a trading company (or the holding company of a trading group), and you must be an employee or officeholder (e.g., director) of the company.
- Business or Part of a Business: This includes a sole trader or partnership business, where the disposal is of the whole or part of a business. Assets associated with the business, such as goodwill, that are disposed of as part of the business.
- Associated Disposal: This is a disposal of assets that are used in the business at the same time as you dispose of the interest in the business itself. The asset must have been used in the business for at least 2 years up to the date of disposal.
How to Claim Business Asset Disposal Relief
There are two main ways to claim business asset disposal relief:
- Self Assessment Tax Return: If you already file a Self Assessment tax return, you can include your business asset disposal relief claim within it. There will be a specific section for Capital Gains where you can indicate your claim.
- Business Asset Disposal Relief Relief form: If you don’t file Self Assessment returns, you can claim BADR by filling out a separate form, Section A of the Claim for Entrepreneurs’ Relief form (claim form HS275). This can be obtained from HMRC.
The deadline for claiming BADR is strict: 31st January following the tax year in which you disposed of the asset.
How Much Can You Save?
The potential savings from claiming BADR can be substantial. For example, if you’re a higher-rate taxpayer and you dispose of a qualifying business asset that has gained in value, you could save up to £100,000 in tax. This is because the 10% rate under BADR is significantly lower than the 20% rate that would otherwise apply.
However, it’s important to bear in mind that there is a lifetime limit on the amount of relief that can be claimed under BADR. This limit is currently set at £1 million. This means that once you’ve claimed relief on £1 million worth of gains, any further gains will be taxed at the regular rate.
Business Asset Disposal Relief and Employee Ownership Trusts
Business asset disposal relief and Employee Ownership Trusts (EOTs) are two separate mechanisms in the UK tax system that can offer significant tax advantages. They can sometimes be used in conjunction, particularly when business owners are considering selling their businesses to an EOT.
If you sell more than 50% of your shares to an EOT, the sale is generally exempt from CGT. This makes the BADR benefit redundant in this context, as there is no CGT to reduce. However, if you sell less than a controlling interest to an EOT or make other types of qualifying disposals not involving an EOT, BADR can still be relevant.
For example, if you sell part of your shares to an EOT and retain a portion, the gain on the shares sold to the EOT is CGT-free, while the remaining shares could potentially qualify for BADR when they are sold later, provided you meet the BADR conditions at that time.
Combining both reliefs requires strategic planning. Consulting with a tax advisor is crucial to navigate the complexities and ensure compliance with all requirements.
Maximising the Benefits of Business Asset Disposal Relief
Business asset disposal relief offers a valuable tax-saving opportunity for business owners in the UK by reducing the capital gains tax rate on qualifying disposals to 10%. To benefit, specific criteria related to ownership and involvement in the business must be met, and the relief applies to various business assets, including shares in a personal company.
Strategic planning and professional advice are essential to maximise the benefits of BADR and navigate the complexities of the UK tax system. For expert guidance and support, consider reaching out to Mazuma’s accounting services.
