Business Asset Disposal Relief (BADR), a successor to Entrepreneurs’ Relief, is a capital gains tax (CGT) relief available to an individual who makes a qualifying business disposal. The effect is to reduce the CGT rate applied to the gain on the disposal of a business asset to 10% (subject to a lifetime allowance).
How CGT typically works for individuals
Generally speaking, CGT is owed on the disposal of a chargeable asset (note that not all assets are chargeable – cars for example are always likely to make a loss and are therefore exempt). After the deduction of allowable costs and the available annual exemption (currently £12,300), the CGT rate is 10% where the gain falls within the individual’s basic rate band. When proceeds exceed the basic rate band, the rate is increased to 20%. Note that when the asset in question is a residential property, the rates are increased to 18% and 28% respectively.
How Business Asset Disposal Relief works
If the conditions for BADR are satisfied, and subject to the lifetime allowance, all gains on the disposal of a business asset are reduced to the lower CGT rate of 10%, regardless of the extent to which it exceeds the basic rate threshold. It can be claimed an unlimited number of times but is subject to lifetime limit of £1m – therefore the total amount of saving under BADR that can occur is £100,000. Where a claim for
BADR is made for a disposal, it is made on the entire disposal and cannot be claimed for only a proportion of it.
Claiming the relief can be done via an individual’s self-assessment tax return or by filling in the Business Asset Disposal Relief help sheet. It must be claimed by the first anniversary of the 31 January following the tax year of disposal. For disposals in the 2022/23 tax year, BADR must be claimed by 31 January 2025.
The conditions required
To claim BADR, there are a few conditions that must be satisfied. First, the disposal must be that of a qualifying business disposal. A qualifying business disposal includes a material disposal of business assets. So, what does it mean to dispose of a business asset and what makes a disposal ‘material’? A disposal of a business asset is:
- a disposal of whole of the whole or part of a business; or
- a disposal of (or of interests in) one or more assets in use, at the time at which a business ceases to be carried on, for the purposes of the business; or
- a disposal of one or more assets consisting of (or of interests in) shares in or securities of a company.
It counts as ‘material’ when either of the following is satisfied:
- the business is owned by the individual in the two years before the disposal
- the business is owned by the individual in the two years before the date the business ceased to trade and the asset is disposed of within a three-year period after the date of cessation.
In the case that the disposal is of shares or securities, it is ‘material’ if in the two years prior to the disposal:
- the company is a trading company or the holding company of a trading group
- the company is the individual’s ‘personal company’ and the individual is an officer or employee of the company
‘Personal company’ means that the individual holds at least 5% of both the ordinary share capital and the voting rights of the company. Further, the individual must be entitled to either 5% of profits of the company or 5% of the proceeds upon the sale of the company.
If the above is not satisfied for shares and securities, there are a further three conditions that it could fall under – it only needs to satisfy one condition.
BADR is an effective tax planning tool. It can yield significant savings on its own but can also be tied into larger plans to further boost efficiency. For example, within the legislation there are relaxed BADR provisions when it relates to the disposal of Enterprise Management Incentive shares. In such instances, the requirement for the individual to have a 5% interest in the total shareholding of the company is removed, furthermore the two year ownership period begins on the date the options over the shares were granted, not when the options were exercised.
BADR is also very practical for small business owners, particularly for spouses and civil partners. There may be opportunities to make use of the two individuals’ entitlement to the lifetime allowance where they jointly own a business. If a spouse is not involved in the ownership of the business, it could be worth considering how doing so might yield tax efficiencies, not least of all with regards to BADR. Advanced clearance from HMRC confirming that a transaction will qualify for BADR is not possible. It is therefore important that there is a complete understanding of how the relief works to avoid penalties from HMRC in the future.
If you have any questions regarding BADR or any other Tax planning matters then please feel free to contact us
The HMRC Capital Gains Manual can be viewed here