Contents
What is Business Asset Disposal Relief?Where does BADR apply and when is it available?How does Business Asset Disposal Relief save you money?How was BADR changed in the 2020 BudgetWho can claim Business Asset Disposal ReliefHow to claim Business Asset Disposal ReliefDeadlines for claiming Business Asset Disposal Relief
What is Business Asset Disposal Relief?
If you are selling shares in all or part of your business, you might qualify for a Capital Gains tax relief called Entrepreneurs' Relief.
Below, you'll find a short guide providing a quick overview of the essentials - including how Entrepreneurs' Relief works, whether you're eligible for a claim and how you can make a claim. Keep in mind that this is a general guide, and we highly recommend speaking with a self-employed accountant before you make a claim.
Entrepreneurs' Relief is a scheme that reduces the amount of Capital Gains Tax payable when you dispose of (sell) shares in your business. Instead of the usual rates, you pay a reduced tax rate of 10% on the first £10 million of gains. There isn't a limit to the number of times you can claim.
If you are selling shares in all or part of your business, you might qualify for a Capital Gains tax relief called Business Asset Disposal Relief (BADR), previously referred to as 'Entrepreneurs' Relief'.
Below, you'll find a short guide providing a quick overview of the essentials - including how Business Asset Disposal Relief works, whether you're eligible for a claim and how you can make a claim. Keep in mind that this is a general guide, and we highly recommend speaking with an accountant before you make a claim.
Business Asset Disposal Relief is a scheme that reduces the amount of Capital Gains Tax payable when you dispose of (sell) shares in your business. Instead of the usual rates, you pay a reduced tax rate of 10% on the first £1 million of gains. This is much lower than the capital gains tax rates that would apply at a rate of up to 28%. There isn't a limit to the number of times you can claim.
Where does BADR apply and when is it available?
BADR applies to disposals of:
- Shares in a company you own
- A sole trade and its assets
- Joint venture interests
- Partnership interests and assets
- Business assets held by a trust
When is it available?
- BADR is available to CGT disposals made by individuals and trustees and qualifying disposals of business assets
- BADR does NOT apply to disposals by companies, the disposal of investment or non-business assets
The limits of BADR
- BADR reduces the rate of Capital Gains Tax (CGT) payable on qualifying disposals to 10%
- BADR can be claimed up to a lifetime limit of qualifying capital gains4
How does Business Asset Disposal Relief save you money?
If you qualify for the relief, you will pay a tax rate of 10% on the first £1 million of gains you make. Gains above the first £1 million are taxed at the usual rate.
If you are a higher or additional rate taxpayer, this means that you will be paying about half the usual rate (which is either 20% or 28%). This amounts to tax savings of up to £100,000.
There is a lifetime allowance of £1 million of gains that can be taxed at the reduced rate. This applies to each individual, and not for each business that is sold.
Example:
Let’s say you decide to close down your contracting business. After settling your liabilities, there’s £100,000 in the company business bank account. And selling off your equipment brings in another £50,000.
This leaves you with a profit of £150,000.
Similar to income tax, there is a year tax-free Capital Gains threshold, which currently sits at £12,300. Therefore leaving you with a taxable amount of £137,700. This would ordinarily be taxed at a rate between 18-28% depending on certain criteria (for this example, we will assume the standard 20% Capital Gains Tax).
This would leave you to pay a sizable amount of £27,540.
However, with Business Asset Disposal Relief, you will be required to pay only 10% Capital Gains Tax under BADR rules. This would leave a tax bill of £13,770, creating a saving of £13,770.
Our limited company expenses guide talks through all the different expense categories you can claim for along with key examples and how this can impact your corporation tax.
- Allowable business expenses
- Employee expenses
- Travel expenses
- Office & equipment expenses
- Professional services expenses
- General expenses
How was BADR changed in the 2020 Budget
At Budget 2020 the Chancellor of the Exchequer announced that the lifetime limit of Entrepreneurs’ Relief would be reduced from £10 million to £1 million for Entrepreneurs’ Relief qualifying disposals made on or after 11 March 2020. At the same time Entrepreneurs'' Relief was renamed to Business Asset Disposal Relief.
The current legislation can be found here HS275 Business Asset Disposal Relief (2021).
Who can claim Business Asset Disposal Relief
Ordinarily, you can claim Business Asset Disposal Relief if you meet the following conditions:
- you are an employee or office holder of the company, for at least two years before you sell your shares
- the company has been trading for at least two years before you sell your shares
- the business must be a 'personal company' for at least two years before you sell your shares. This means that you need to own at least 5% of both the shares and voting rights.
- you must be entitled to at least 5% of the company's distributable profits or 5% of the company's net worth at its dissolution
If the company ceases trading, you can still qualify for Business Asset Disposal Relief if:
- the conditions above were met for the duration of the 24 month period prior to the company ceasing to trade
- disposals are made within three years after a company ceases trading
- assets distributed within the company are taxed as capital distribution not as income
If the shares are from an Enterprise Management Incentive (EMI), then further conditions apply:
- you must have bought the shares before April 2013
- you must have acquired the option to buy the shares at least a year before selling them
The rules surrounding Business Asset Disposal Relief can get complicated, so if there are aspects you are unsure about it is best to consult a qualified accountant.
How to claim Business Asset Disposal Relief
You can claim the relief on your annual Self Assessment tax return, under the 'Capital Gains Summary' section, or by completing Section A of the Business Asset Disposal Relief helpsheet.
It is also possible to claim Business Asset Disposal Relief on the sale of other assets which are not shares. The rules on this are different and it is best to discuss your individual case with a qualified accountant.
Deadlines for claiming Business Asset Disposal Relief
- For the 2021/22 tax year ending 5th April 2022, the deadline is 31st January 2024
- For the 2020/21 tax year ending 5th April 2021, the deadline is 31st January 2023
Our small business accounting guide walks through absolutely everything you need to know if you're considering starting a limited company. From different taxes, limited company advantages/ disadvantages, how to pay yourself, and what your key filing requirements are.
- When to register a Ltd company
- When to register for VAT
- How to take money out of your company
- Dividend tax rates
- Limited company expenses & corporation tax
- Annual accounts and deadlines
Our limited company expenses guide talks through all the different expense categories you can claim for along with key examples and how this can impact your corporation tax.
- Allowable business expenses
- Employee expenses
- Travel expenses
- Office & equipment expenses
- Professional services expenses
- General expenses
Read more of our Small Business Accounting guides:
Book a free consultation to learn more about entrepreneurs relief and whether this is right for you.
We help you understand how to actually pay yourself as a limited company director or sole trader. This guide helps explain the different tax rates, filing requirements and which company structure is best for you.
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