What is Business Asset Disposal Relief?

Entrepreneur’s Relief has provided a huge boost to UK business owners over the years by enabling them to pay less Capital Gains Tax (CGT) on the sale of their company or shares. In April 2020, the government replaced this tax break with the less snappily titled ‘Business Asset Disposal Relief’ (BADR).

BADR is also much less generous than its forerunner, but it still offers substantial CGT relief to business owners looking to dispose of assets.

What is Business Asset Disposal Relief?

BADR offers a tax break to individuals who dispose of all or part of their business, or shares in their personal company. It also covers trustees who dispose of business assets. The tax break aims to make the UK an attractive place to set up and run a business.

Critics of Entrepreneur’s Relief said it was too generous, so from April this year the government replaced it with BADR and cut the relief significantly.

Most importantly, it reduced the lifetime limit on CGT relief that business owners can get when disposing of a business to a tenth of the previous level.

How much can it save me in tax?

Just like Entrepreneur’s Relief, BADR still offers to half your CGT rate to 10% when you dispose of qualifying business assets. However, for disposals on or after 11 March 2020, claims will be limited to the first £1 million of lifetime gains – compared to the £10 million limit under Entrepreneur’s Relief.

After the first £1 million, any remaining disposals will be subject to the main CGT rate, currently 20%. The maximum available relief has therefore fallen from £1 million to £100,000.

Any individual who has already claimed Entrepreneur’s Relief on gains of £1 million or more will no longer qualify for CGT relief on any future disposals.

Do I qualify for Business Asset Disposal Relief?

To qualify for BADR, you must have owned the business and been a sole trader or business partner for at least two years before you sell it. You must also dispose of your business assets within three years to qualify for relief.

Also, both of the following must apply for at least two years before you sell your shares:

• you must be an employee or office holder of the company
• the company’s main activities must be in trading goods or services - rather than non-trading activities like investment - or it must be the holding company of a trading group. For example, if you buy some land to build a factory that makes goods for sale, that is regarded as trading. If you buy land simply to gain a rental income, that is not trading.

There are a variety of other rules, most of which aim to ensure that the claimant has a genuine, material stake in the business.

What if my company stops trading?

If your company stops trading, you can still qualify for relief if you:

• sell your shares within three years
• have sold at least 5% of your part of a business partnership or your shares in a personal company, and
• have owned the assets but let your business partnership or personal company use them for at least one year before you sold your business or shares, or before the business closed.

How to calculate Business Asset Disposal Relief

If all your gains in the tax year qualify for BADR, work out the gains for all qualifying assets and add them together. Deduct qualifying losses, to work out the total taxable gain eligible for relief. Next, deduct your CGT allowance, which is £12,300 for individuals and £6,150 for trusts. You pay 10% tax on what is left.

If you have other gains, the amount you pay depends on your income tax rate - see more details here.

How to claim Business Asset Disposal Relief

Where possible, you should claim BADR through your tax return. There is no limit to how many times you can claim, providing it is within the £1 million lifetime limit.

You may be able to claim more if you disposed of your assets before 11 March 2020. Check the deadlines for claiming or contact HMRC.

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