Business Asset Disposal Relief - how can it benefit you?
Posted on 7th January 2021
Business Asset Disposal Relief was previously known as Entrepreneurs’ Relief. It is an incentive set up by the UK Government which makes it possible for business owners to pay tax at a reduced rate as low as 10% when they sell all or part of their business in 2020/2021.
There is no limit to the amount of times you can claim the relief and you can claim up to £1 million of BADR during your lifetime. Prior to 11th March 2020, you could claim up to £10 million.
This means that if you have previously claimed entrepreneurs’ relief on gains of £1m or more, then unfortunately any future disposals will not qualify for the relief in its new format.
Similarly, if you haven’t claimed entrepreneurs’ relief before then only the first £1m will qualify for the 10% and the rest of the disposable will be taxable at 20% in 2020/2021.
Any transactions, such as share reorganisation or company restructure that took place between 6th April 2019 and 11 March 2020, would also be subject to the lower lifetime limit of £1 million.
Who is it available to?
Various conditions apply in order to claim the relief, depending on which asset you are planning to sell off. It might be all or part of your business, shares or securities in a trading company or other assets you may have lent to the business.
In order to qualify on disposal of a business in 2020/2021, you must have owned the business for at least 2 years and be either a sole trader or in a business partnership.
If, perhaps due to the financial implications of COVID-19, you are planning to close your business, then all business assets must be sold within 3 years to be eligible.
There are 3 conditions that must be met when it comes to disposing of any shares or securities during the 2 years leading up to the disposal:
1. The company’s main activities need to be in trading or it must be the holding company of a trading group.
2. You need to be employed by the company or hold office in the company.
3. You must hold 5% of the company shares and voting rights as well as being entitled to at least 5% of either the profits available for distribution plus the assets on winding up the company or the disposal proceeds if the company is sold.
If the shares are from an enterprise management initiative, then other eligibility criteria applies, although the 5% condition would not apply.
If the company stops trading then you would have to sell the shares within 3 years to be eligible for the relief.
For any assets that you have lent to the business, when it comes to selling them, you must sell at least 5% of your part of a business partnership or your shares in a personal company.
Also, you should have owned assets that the business or partnership used for at least 1 year prior to the date they were sold or the business closed.
What are the benefits of Business Asset Disposal Relief?
The main benefit is to reduce your Capital Gains Tax from a potential 20% down to 10%, meaning you would then be able to keep more of the profits or gains.
To claim Business Asset Disposal Relief, you must do it via HMRC. The most common way is by submitting a claim on your annual self-assessment tax return. It must be made before the first anniversary of the 31st January following the end of the tax year in which the relevant tax disposal takes place.
However, due to the enormous strain that the Coronavirus pandemic has taken on Government spending, it may be that the Business Asset Disposal Relief is altered again to save the Exchequer money in the future.
Next steps
For further information please refer to the HMRC information here
Please feel free to book a call or drop us an email if you’d like to chat about how we can help you make the most of Business Asset Disposal Relief and everything it can do for you. It makes sense to enjoy the tax benefits of this concession if you’re a business owner or company director looking to sell your business, either in whole or in part.
Written by
Nicola J Sorrell -
Effective Accounting
Founder | Xero Champion | IR35 Expert
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