Business Asset Disposal Relief

Business Asset Disposal Relief

Business Asset Disposal Relief is a means by which individuals (not companies) can reduce their capital gains tax liability on the disposal of material business assets.
As the UK government considers ways to reduce tax relief and increase income, many business owners will be relieved to find that Business Asset Disposal Relief (BADR) remains unchanged. Previously called “Entrepreneurs Relief”, BADR is an integral part of planning for business owners. Despite being seen as a means of incentivising individuals to grow and invest in their business, many believe that it will eventually be removed. So, what does BADR offer business owners today?

What is Business Asset Disposal Relief?

BADR is a means by which individuals (not companies) can reduce their capital gains tax liability on the disposal of material business assets. The idea behind this tax relief is simple; a potential reduction in capital gains tax liability was seen as a way to incentivise individuals to invest in their business. Currently, you can claim a total of £1 million BADR over your lifetime. As illustrated in the table below, BADR is only beneficial for higher and additional rate taxpayers:-
Tax Band Business Asset Disposal CGT Rate Normal Charge BADR Rate BADR Charge Saving
Basic rate £1 million 10% £100,000 10% £100,000 £0
Higher rate £1 million 20% £200,000 10% £100,000 £100,000
Additional rate £1 million 20% £200,000 10% £100,000 £100,000
Previously, before 11 March 2020, the lifetime limit was £10 million with a maximum saving of £1 million for higher rate and additional rate taxpayers. When BADR replaced Entrepreneurs Relief, the lifetime limit was reduced to £1 million. Many observers had expected the Chancellor of the Exchequer to phase out BADR in the October 2021 budget. Thankfully, this relief lives to fight another day!

Which asset disposals qualify for BADR?

As you might expect, once you begin to delve a little deeper into BADR, you realise that not all asset/business disposals qualify. To qualify for BADR, the disposal must fall into one of the following two categories:-
  • A material disposal of business assets
  • A disposal associated with a material disposal of business assets
At first glance, these two categories appear to be very similar, if not identical. However, there are some significant differences to consider.

What is a material disposal of business assets?

It is important to note that BADR can relate to a sole trader, partnership or a company in which an individual has an interest. Interestingly, if an asset was used in a business when it ceased trading, it may be possible to claim BADR on any subsequent disposal. While there are always exceptions to the rule, the three more common types of business assets associated with BADR are covered below.

Whole/part sale of a sole trader/partnership business

For the sale of a whole/part of a sole trader/partnership business to qualify for BADR, two specific conditions need to be met:-
  • The taxpayer must have owned the business throughout the two years before the date of disposal
  • The disposal must be all of the business or an element which is in effect a business in its own right
These two conditions ensure that individuals cannot take over a company and then immediately apply for BADR.

An asset used when a company ceased trading, consequently sold

When selling an entire business, or a stand-alone part of a group, the relevant assets will be transferred to the buyer on completion. However, the situation can be a little different when claiming BADR on assets, later sold, which were part of a business when it ceased trading. Consequently, there are two specific conditions when it comes to claiming BADR on assets sold after a business ceased trading:-
  • The business must have been owned by the taxpayer throughout the two years before ceasing trading
  • The material asset in question must be sold within three years of the business ceasing trading
While most small print from HMRC tends to work against business owners, it is different in this case. Many people automatically assume that the asset in question must have been used or active during the entire two-year period before the cessation of trading. However, the asset only needs to have been used by the business when it was closed down.

Shares/securities in a company

Many directors and employees with shares or securities in the company they work for will be relieved to know that BADR may be available. The following conditions must be met throughout the two years before the sale:-
  • The individual must have been an employee/director of the holding company or a subsidiary company
  • They must hold a minimum of 5% of the ordinary share capital and voting rights – entitling them to 5% of distributable profits or 5% of company sale proceeds
  • The company must be either a holding company of a trading group or a trading company subsidiary
Under HMRC regulations, if more than 20% of the company’s “activities” consist of investment-based trading, the asset disposal won’t qualify for BADR. HMRC specifically mentions property businesses (except for some furnished holiday letting businesses) and investment portfolios as ineligible as an element of trading activity. The 20% test can relate to a variety of different measurements such as:-
  • Expenditure
  • Management time
  • Assets
  • Turnover
Tax advice must be taken if you are planning to apply for BADR any time in the future. As you can see above, if, for example, an investment portfolio was a significant element of your company, then your asset disposal may not qualify.

What is an associated disposal?

As part of the withdrawal from a business, a partner must dispose of at least 5% of the partnership assets and a shareholder at least 5% of the company’s share capital. Where an individual has a minimum 5% share in a business, this is seen as a “personal company” by HMRC. A disposal of assets will be deemed as an associated disposal if all of the following conditions are met:-
  • There is a material reduction in the individual’s ownership of the business, hence the 5% disposal of partnership assets or 5% disposal of share capital
  • The disposal is part of a planned withdrawal from the business, and while control has been reduced, they can continue to work for the business
  • The asset was part of the business for a minimum of two years and owned by the individual for a minimum of three years before disposal
Where there was an agreement that the business would pay for the use of the asset, or it was not owned for the entire period, full BADR may not be available.

Claiming Business Asset Disposal Relief

Claiming BADR is a relatively simple process, included as part of your self-assessment tax return. Consequently, BADR must be claimed by 31 January in the year following the tax year of disposal. So, for example, if you disposed of an eligible asset in the tax year 2021/22, you would need to claim BADR by 31 January 2023. As we touched on above, some areas are not clear as to whether an asset disposal would come under the BADR regulations. Unfortunately, as with other types of tax relief, you cannot request prior clearance from HMRC. Therefore, you will need to take advice from your accountant before factoring a claim for BADR into your tax return calculations.

Conclusion

When BADR, or Entrepreneurs Relief in its former guise, was reduced from £10 million to £1 million, many predicted it would soon be phased out. Some people expected this to be announced in the October 2021 budget, although thankfully, there was no mention of BADR. As ever, the idea of BADR is relatively straightforward, but in practice, there are numerous conditions in the small print. Therefore, you must take advice from your accountant to check whether you are eligible for BADR.

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