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If you’re considering selling your business, whether in part or in full, or winding up altogether, it’s worth investigating whether you’re eligible for Business Asset Disposal Relief (BADR).
Introduced in 1998 and renamed as a result of the Finance Act 2020, Business Asset Disposal Relief offers business owners and those holding shares in a business the opportunity to reduce their Capital Gains Tax liability.
While it’s pretty straightforward, there are some important things to be aware of. In this article, we explain what Business Asset Disposal Relief is, as well as the limits that claims are subject to and some of the qualifying criteria.
Previously known as Entrepreneurs Relief, Business Asset Disposal Relief is a type of tax relief available to those looking to sell their shares or securities, all or part of their business, or on the closure of a company, providing the required criteria are met in each case.
Usually, the sale or disposal of an investment, such as shares, would result in capital gains tax becoming due on the difference between what you originally paid for them to what you sold them for.
Under the BADR scheme, you’ll pay Capital Gains Tax at a flat rate of just 10%, after you have used up any personal Capital Gains Tax Relief you have for the year. In contrast, the tax – levied on business profits, whether from routine operations or disposal of an asset – can be as high as 28% for higher-rate taxpayers.
That means under the scheme, you could only pay a maximum of £100,000 on the disposal of £1m worth of assets – representing a substantial tax saving.
The current Business Asset Disposal Relief limit is up to £1m over a lifetime. This can be spread over several disposals, so if you decide (for example) to sell shares or businesses on more than one occasion, you’ll still be eligible up to that limit.
The eligibility for Business Asset Disposal Relief is quite strict, however, and can change depending on the nature of your disposal.
If you are selling all or part of your business, then you must meet the following conditions:
You must have owned the company for at least two years
You’re a sole trader or business partner
These conditions apply if you’re winding up the company rather than selling it. In both cases, you must dispose of the assets within three years to be eligible for Business Asset Disposal Relief.
If you are selling shares or securities, then the qualifying criteria are different, and both of the following must apply for at least 2 years up to the sale of your shares:
You must be an employee or office holder of the company (or one in the same group)
the company’s main activities are in trading (rather than non-trading activities like investment) - or it’s the holding company of a trading group
The rules are different again if the shares come from an Enterprise Management Incentive (EMI).
Business Asset Disposal Relief is also relevant to individuals operating via their own limited company.
If you’ve decided to stop working through a limited company – as a result of IR35 reform, say, or because you plan to retire – you may be considering winding up your company, or selling it.
Either winding up or selling your business – in part or whole – will attract Capital Gains Tax. However, Business Asset Disposal Relief means you can pay a lower Capital Gains Tax rate, reducing your tax liability.
So, Business Asset Disposal Relief is a type of tax relief that business owners, business partners and sole traders can claim when selling part or all of their business. You can claim up to £100,000 tax relief on a maximum of £1m in your lifetime.
If you need more information, it’s worth reading the Business Asset Disposal Relief HMRC manual, which covers very detailed guidance.
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