Business Asset Disposal Relief Explained – Can You Claim It?
Business Asset Disposal Relief is a tax relief amount that reduces the Capital Gains Tax due after disposing of an asset. It was once called Entrepreneurs’ Relief.
In this article, you will learn about Business Asset Disposal Relief, how it works, and what it means for Capital Gains Tax.
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- Business Asset Disposal Relief (BADR): How Does it Work?
- Does Asset Disposal Always Mean Asset Sold Out?
- What is the capital gains tax I have to pay for BADR?
- Restrictions on the Use of Business Asset Disposal Relief?
- Business Asset Disposal Relief- For Lifetime
- Capital Gains Tax for Taxpayers on the Higher Rate of Income Taxes
- BADR Relief: When and How to Apply For the Scheme?
- Is there any deadline for applying for BADR?
- What are the criteria for individuals selling their entire business or being part of it
- BADR works with Schemes like Capital Allowances, VAT, and Income Tax Relief
- Is there any alternative to BADR?
Business Asset Disposal Relief (BADR): How Does it Work?
Knowing Capital Gains Tax (CGT) is essential to understanding BADR. CGT is a tax on the profits you make after disposing of assets. When you dispose of an asset, you get a profit, which is your gain, meaning that CGT is a tax on your gain.
Does Asset Disposal Always Mean Asset Sold Out?
No, the term “disposal” does not always mean sold out. Disposing of the asset can also mean exchanging a business or a part of a business for something else. That means you invested in something else. There are two options.
- You may close the limited company and dispose of part of the business or shares.
- Your assets have been stolen or damaged, and you have been paid back the loss amount just like the insurance payout.
However, only some businesses qualify for BADR. To be eligible for Business Asset Disposal Relief, your asset must fall under the following categories:
| Entire Business | The entire business selling can qualify for BADR |
| Part of the Business | Selling a branch or business division can also be eligible for the BADR. |
| Shares in a Business | If you own any shares, you can be eligible for BADR on those shares when you sell them off. |
So, only some sales qualify; only significant business assets are eligible for BADR tax relief.
| Sole Trader |
| Partnership |
| Personal Company |
| Trust |
| Joint Ventures |
What is the capital gains tax I have to pay for BADR?
- When disposing of qualifying business assets, individuals pay Capital Gains Tax at a 10% rate on all the gains with BADR.
- It’s a significant reduction for higher-rate taxpayers, as the CGT rate will be cut to 10% from 24%.
- The BADR will rise to 14% from April 6 2025.
Restrictions on the Use of Business Asset Disposal Relief?
Business Asset Disposal is only available to individuals who own their business or shares in a specific company. This is only sometimes true for companies, which means a company can only apply for relief with BADR. It only implies the qualified disposal of assets from the business. BADR also can’t be used to dispose of investment assets, but the trading business can use it.
Business Asset Disposal Relief- For Lifetime
Business Asset Disposal is only available to individuals who own their business or shares in a specific company. This is only sometimes true for companies, which means a company can only apply for relief with BADR. It only implies the qualified disposal of assets from the business. BADR also can’t be used to dispose of investment assets, but the trading business can use it.
This column shows the Capital Gains Tax for basic-rate taxpayers.
| Capital Gains Tax 2023/24 | Capital Gains Tax
Up to 30th Oct 2024 |
Capital Gains Tax
From 30th Oct 2024 |
|
| Residential Property Gains | 18% | 18% | 18% |
| Gains From Other Chargeable Assets | 10% | 10% | 18% |
Capital Gains Tax for Taxpayers on the Higher Rate of Income Taxes
| Capital Gains Tax 2023/24 | Capital Gains Tax
Up to 30th Oct 2024 |
Capital Gains Tax
From 30th Oct 2024 |
|
| Residential Property Gains | 28% | 24% | 24% |
| Gains From Other Chargeable Assets | 20% | 20% | 24% |
BADR Relief: When and How to Apply For the Scheme?
As long as you qualify for ownership, BADR can be used anytime you dispose of some or all of your business shares. Although there are no set limits, you should meet the criteria of the tax regulations authority. The maximum relief set for your lifetime is capped at £1 million.
Following are the ways to claim BADR if you are eligible for the scheme.
- Apply to BADR through a Self-Assessment Tax Return.
- File section A of the Business Asset Disposal Relief helpsheet to claim BADR.
Is there any deadline for applying for BADR?
To claim BADR, you have until January 31, one year after the end of the tax year you sold your business. However, if you sold your business on May 15, 2023, it will fall within the 2023/2024 tax year from (April 6 2023, to April 5 2024). So, you have until January 31 2025, to submit the claim for BADR.
When will I be Eligible to claim BADR Relief?
To claim BADR, you should keep in mind the following points.
Business Type:
The company you are selling shouldn’t be an investment company but a trading or business company.
Ownership is shared:
You must own 5% of the total shares or voting rights to claim relief on shares. You also must hold these shares for at least two years.
Ownership Duration For Sole Traders or Partnerships
Whether a sole trader or a partnership person, your business must have been actively trading for at least 2 years.
Person’s Role in the Company
Shareholders claiming relief must have been employees or directors for at least 2 years before selling.
What are the criteria for individuals selling their entire business or being part of it?
- If the individuals sell part of their business, the following conditions must be fulfilled.
- The individual must be a sole trader or a business partner.
- He must have owned the business for a minimum of two years.
- This two-year duration is known as the qualifying period. If someone is closing their business, the business person must have owned it for at least three years to become eligible for the BADR.
- Eligibility Requirements for Disposing of Enterprise Management Incentive
- When you sell shares obtained under the Enterprise Management Incentive scheme, you must meet specific requirements to qualify for favourable tax treatment.
| Purchase Date Requirement | It is mandatory to purchase shares before April 5 2013. |
| Period of Holding | The individual must hold the EMI shares for two years before selling them. |
| Non Personal Company | The individual should not control the company shares or have a controlling interest. It shouldn’t be a personal company. |
These conditions should be met to determine if the sale is eligible for certain tax benefits. If the conditions are unmet, the tax rates on the EMI shares offered can be reduced.
What if Shares are not From the Enterprise Management Incentive (EMI)
The following criteria should be followed when the shares being disposed of are not from the Enterprise Management Incentive.
- Individual companies must own the business for at least 2 years before the shares are sold.
- The individuals must also own 5% of the share and 5% of the voting rights.
- The individual is eligible for at least 5% of company profit or disposal proceeds.
- Individuals are also liable for getting BADR if they own less than 5% of shares and when the company issues more shares.
Organisation That Stops Operations as a Trading Company
What if the company stops operating as a BADR company? Individuals can still qualify if they sell shares within 3 years before closing the company.
What if the Individual is a Trustee?
An individual who is a trustee should also qualify for the BADR criteria by selling shares. However, such claims can be complicated and depend upon the trustee’s situation, trust, and beneficiaries.
- The individual must meet the following conditions.
- An individual must be classed as a quantifying beneficiary for three years before any shares are sold. They must also be classed as (QB) for one year before April 6, 2019, or two years after this date.
- The company shares that are sold must be the “personal company” of the qualifying beneficiary.
- An individual must be an officer or an employee of the company.
BADR works with Schemes like Capital Allowances, VAT, and Income Tax Relief
BADR relief only applies to Capital Gains Tax. Other schemes, such as capital allowances, VAT, and income tax relief, will continue working the same way they usually do. However, BADR will not impact these schemes in any way.
Is there any alternative to BADR?
This all depends upon the business size and the asset being disposed of. Other schemes are worth considering due to BADR’s £1 million lifetime limit. However, these schemes include
- Investors Relief
- Enterprise Investment Schemes
- Employee Ownership Trust