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Business Asset Disposal Relief (BADR) used to be known as Entrepreneurs’ Relief before 6 April 2020. The relief was renamed in Finance Act 2020. The name change does not affect the operation of the relief.
BADR can be a valuable relief and applies to the sale of a business, shares in a trading company or an individual’s interest in a trading partnership. Where this relief is available a reduced CGT rate of 10% is payable in place of the standard rate. There are a number of qualifying conditions that must be met in order to qualify for the relief.
Qualifying limits to claim BADR
When the relief was first introduced there was a lifetime limit of £1 million for gains. The lifetime limit has changed over the years and was reduced to £1 million (from £10 million) on 11 March 2020.
The £1m lifetime limit means that individuals can qualify for the relief more than once subject to an overriding total limit of £1m of qualifying capital gains. The changes to the lifetime limit are not retrospective.
Qualifying conditions to claim BADR
There are qualifying conditions that must be met to ensure you are eligible to benefit from the lower 10% rate.
If you are selling all or part of your business, then both of the following must apply in order to qualify for relief:
- You must be a sole trader or business partner; and
- You must have owned the business for at least 2 years before the date you sell it.
The same conditions apply if you’re closing your business instead. You must also dispose of your business assets within 3 years to qualify for relief.
If you are selling shares or securities in the business, then you must be an officeholder or employee of the company and own at least 5% of the company and have at least 5% of the voting rights for at least 2 years before you sell your shares. The minimum period during which certain conditions must be met in order to qualify for BADR increased from one to two years from 6 April 2019.
You must also be entitled to at least 5% of either the:
- profits that are available for distribution and assets on winding up the company; or
- the disposal proceeds if the company is sold.
The company must also be a trading company or the holding company of a trading group. If the number of shares you hold falls below 5% because the company has issued more shares, you may still be able to claim BADR. The rules are different if your shares came from certain Enterprise Management Incentive schemes.
How to calculate a BADR claim
HMRC sets out the following steps for making a qualifying claim for BADR:
- Work out the gain for all qualifying assets
- Add together the gains (and deduct qualifying losses) to work out the total taxable gain that’s eligible for BADR
- Deduct your tax-free allowance
- You’ll pay 10% tax on what’s left
How to claim BADR relief
There are two ways you can claim BADR. The most common way is by using your self-assessment tax return. Capital gains summary (SA108) is used to record capital gains and losses.
A claim can also be made by filling in Section A of the Business Asset Disposal Relief helpsheet – HS275.
Deadline for making a BADR claim
The deadline for making a claim is the first anniversary of 31 January following the end of the tax year in which you made the qualifying disposal. For example, if you sell your business at any time between 6 April 2020 and 5 April 2021 then you will need to claim this no later than 31 January 2023.
Investors’ Relief
There is also a sister relief called Investor’s Relief which has a separate £10 million lifetime cap. Investors’ Relief is available to investors in qualifying shares of an unlisted trading company. There are many conditions to qualify for the relief and it is important to consider the relief from the outset, as many of the conditions need to be met for the whole period of share ownership. Investors’ Relief is not available if the investor, or anyone connected with the investor, is an officer or employee of the company.
If you have any questions about the issues raised in this article, we at Key Business Consultants can help. Get in touch with us today or call us directly on 02037 282 848.
