Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, offers significant tax benefits to business owners when they sell or dispose of qualifying business assets. This tax relief is particularly helpful for those looking to exit their business or retire. In this post, we’ll break down the basics of BADR, who is eligible, and how to claim it, along with some alternative relief options you might consider.
What Is Business Asset Disposal Relief?
Business Asset Disposal Relief allows individuals to pay a reduced rate of Capital Gains Tax (CGT) when they dispose of certain business assets. Typically, CGT is charged at 20% for higher-rate taxpayers, but with BADR, this rate drops to just 10% on qualifying disposals, offering substantial savings. However, there’s a lifetime limit of £1 million on qualifying gains, beyond which standard CGT rates will apply.
To qualify, business owners must meet specific conditions, such as being actively involved in a trading business and holding a significant stake (at least 5%) for a minimum of two years. This relief is designed to encourage business growth and reward those who invest in their business.
Who Is Eligible for Business Asset Disposal Relief?
Business Asset Disposal Relief is available to individuals who sell their business or business shares. Eligible entities include:
- Sole traders
- Partnerships
- Personal companies
- Joint ventures
- Trusts
In general, to qualify for BADR, you must meet the following conditions:
- Own at least 5% of a trading business or shares in a trading company.
- Have held the business or shares for at least two years.
- Be involved in the management or day-to-day running of the business.
This relief is not available for investment assets or businesses that aren’t actively trading, so it’s important to confirm your business qualifies before proceeding.
What Counts as a Qualifying Disposal of Business Assets?
Disposing of a business asset doesn’t necessarily mean selling it. It could include:
- Giving it away
- Swapping it
- Selling part of your business or shares
- Receiving compensation for a stolen or damaged asset
For a disposal to qualify for BADR, it typically must involve a significant part of the business or shares in a trading company. Property businesses, such as those involved in letting or renting properties, generally do not qualify, with the exception of furnished holiday lettings (FHLs), which have specific criteria.
When and How to Claim Business Asset Disposal Relief?
To claim BADR, business owners must ensure they meet the qualification criteria when disposing of their assets. The relief is claimed through a self-assessment tax return or by completing the Business Asset Disposal Relief helpsheet provided by HMRC.
If you’re selling a portion of your business, or transferring shares, it’s important to confirm that the transaction qualifies for BADR. Working with a tax professional can help ensure the transaction is handled properly and all conditions are met.
Alternative Schemes to BADR
While BADR offers significant tax relief, it is not the only option for business owners. Depending on the nature of the asset and the size of your business, other relief schemes may be more suitable:
- Investors’ Relief: This scheme provides a 10% CGT rate on gains from qualifying shares in unlisted trading companies, with a lifetime limit of £10 million.
- Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS): These schemes offer tax relief to investors in small, high-risk companies.
- Employee Ownership Trusts (EOTs): This option allows business owners to sell shares to a trust, promoting employee ownership and offering tax advantages.
These alternatives might provide greater tax benefits depending on your business situation, so it’s advisable to consult with tax experts before making any decisions.
Conclusion
Business Asset Disposal Relief is a valuable tool for business owners looking to sell or dispose of their business assets, offering significant savings on Capital Gains Tax. By meeting the qualifying criteria and claiming the relief correctly, you can significantly reduce your tax liability. However, it’s important to understand the eligibility requirements and explore other potential relief schemes to determine the best option for your business. Seeking advice from tax professionals can help ensure you make the most of the available reliefs and avoid any tax pitfalls.
