Selling a business is often the culmination of years of hard work, and ensuring that you benefit from the most advantageous tax treatment is key. If you’re a UK business owner considering a sale, you may be eligible for Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief, which offers significant tax savings. In this blog, we’ll explore what BADR is, how you can qualify, and what you should keep in mind when planning a business disposal.
What Is Business Asset Disposal Relief?
Business Asset Disposal Relief (BADR) is a tax relief that allows individuals selling all or part of their business to pay a reduced rate of Capital Gains Tax (CGT) at 10% on the gains they realise, rather than the standard rates of 18% or 28%. This relief can be incredibly beneficial for entrepreneurs, but there are specific conditions that must be met to qualify.
The relief is available on lifetime gains of up to £1 million, meaning that over your lifetime, you can benefit from this reduced tax rate on gains totalling this amount. Importantly, this limit was reduced from £10 million in 2020 as part of changes introduced by the Finance Act 2020, making it all the more crucial to plan carefully.
When Is BADR Available?
BADR is available for several types of business disposals:
- All or Part of a Business: If you sell a sole trade, share in a partnership, or your entire business, you may qualify for BADR. This applies to those selling a portion or the whole of their business interest.
- Shares in a Personal Company: You can claim BADR if you sell shares in your personal company. To qualify, the company must be a trading company (as opposed to an investment company), and you must meet specific criteria regarding your involvement in the company.
- Associated Assets: If you are selling assets that were used by your business, such as property, you may be eligible for relief, provided the disposal is tied to a broader exit from the business, such as the sale of a partnership stake.
Conditions for Claiming BADR
To claim BADR, you must satisfy several conditions:
- Ownership Duration: You must have owned the business or shares for at least two years before selling them. This two-year period is critical for ensuring eligibility.
- Personal Company: If you are selling shares in a company, it must be your personal company. This means:
- You hold at least 5% of the company’s shares and voting rights.
- You are either an officer or employee of the company (or a related group company).
- The company is a trading company or the holding company of a trading group.
- Partnership Withdrawal or Business Exit: If you are disposing of associated assets, these must be tied to a broader withdrawal from the business. For example, if you’re selling a property used by your business, you need to have reduced or eliminated your involvement in the business.
Potential Pitfalls to Avoid
While BADR offers significant tax savings, there are potential pitfalls to be aware of:
- Failure to Meet the Ownership Period: If you have not owned the business or shares for the required two years, you will not qualify for BADR, even if other conditions are met.
- Mixed Activities in a Business: BADR only applies to trading businesses, not investment businesses. If your business has mixed activities, such as both trading and investment, it could affect your eligibility for relief.
- Changes in Legislation: Recent budgets have introduced stricter requirements, including the need to hold 5% of both economic and voting rights in a personal company. It’s essential to stay informed of any legislative changes that could impact your claim.
Preparing for Business Disposal: The Checklist
Before you dispose of your business, it’s wise to go through a comprehensive checklist to ensure all the conditions for BADR are met. This may include:
- Reviewing your ownership records to confirm the two-year ownership period.
- Verifying your shareholding and role within the company, especially if your business has undergone structural changes.
- Checking if your business qualifies as a trading business under HMRC’s definitions.
Because tax legislation can change, seeking professional advice is crucial to avoid costly mistakes.
How ISA Consortium Can Help
At ISA Consortium, we specialise in helping UK business owners navigate the complexities of tax reliefs like BADR. Whether you’re planning to sell your business, dispose of associated assets, or transfer shares, our expert team can provide tailored advice to maximise your tax savings and ensure compliance with HMRC regulations.
In addition to BADR, we offer assistance with a wide range of tax-related services, including Capital Gains Tax planning, Inheritance Tax strategies, Retirement Planning, and Self-Assessment Tax Returns. By working with us, you can have peace of mind knowing that your finances are in the best possible hands.
Get in Touch
If you’re considering selling your business or just want to ensure you’re on the right track with your tax planning, contact us today at ISA Consortium. Our experienced accountants and business advisors are here to provide you with the guidance you need to make informed decisions and optimise your tax position.
Maximise your returns and minimise your tax liabilities with expert advice from ISA Consortium – your trusted business and tax advisors in the UK.
ALL THIS AND MORE
We offer all the above as part of our full Tax Services and Accounting and can also help you with Capital Gains Tax, Inheritance Tax, Retirement Planning, even filling out your Self-Assessment Tax Returns for you.
