Business asset disposal relief (BADR) is a capital gains tax (CGT) relief that allows business owners with chargeable gains on qualifying business assets to pay CGT at a rate of 10%. This relief is available on up to £1m of capital gains for each individual over their lifetime and is available on gains arising to sole traders, partners, shareholders and trusts.
There are three main categories of qualifying business disposals. Firstly, the disposal of the whole or part of a sole trader or partnership business will qualify for BADR if the business has been owned by the individual for a minimum of two years. In addition, the disposal of an asset used in a business at the time the business ceases to be carried on can qualify for BADR as long as the disposal occurs within three years of cessation. Lastly, the disposal of shares or securities in a company will be within the relief if the company is the individual’s personal company.
The shares which are sold need to be in an individual’s personal company so they would need to own at least 5% of the ordinary share capital and therefore be able to exercise at least 5% of the voting rights. The 5% requirement also extends to profits available for distribution on a winding up and proceeds on a sale.
A trading company cannot carry on, to any substantial extent, activities that are not trading activities. It is generally accepted by HMRC that this means at least 80% of the company’s activities must be trading in nature. Determining the trading status for the company depends on all the underlying circumstances in each case including turnover, the asset base, expenses of the company and where the directors’ time is spent.
If all the other qualifying conditions for the company and the individual are met but the company has ceased trading, the two-year holding period test would end on the date that the company ceases trading. From that date the individual would have another three years in which to dispose of their shareholding to qualify for BADR.
Quite often a shareholder or business owner may personally own an asset, for example a property, which is used by the company or the business in the trade. BADR may be available if such an asset is sold as part of the shareholder or owner withdrawing from the business. The asset must have been used by the business for two years and have been owned by the individual for at least three years before the disposal. To qualify for BADR the property must not have been rented to the business.
Gains and losses on assets qualifying for BADR must be aggregated in order to find the net gain eligible for relief which is then taxed at a CGT rate of 10%. Gains that qualify for BADR are taxed in priority to other gains. They use up any basic rate band first and may therefore push other capital gains into the higher CGT rate. However, the annual allowance may be used in the most advantageous way. It should therefore be set against gains that do not qualify for BADR before being set against those that do.
Generally, if the EMI shares were granted at least two years prior to disposal then the disposal will qualify for BADR. Again, the company needs to be a trading company and the claimant an officer or employee of the company or another company in the group.
BADR must be claimed by the first anniversary of the 31 January following the tax year of the disposal (i.e. no later than 31 January 2022 for disposals in 2019/20).
Gain deferred through EIS becomes chargeableThe enterprise investment scheme (EIS) encourages individuals to invest money in shares issued by qualifying unquoted companies.A subscription for eligible shares of a qualifying EIS company is a tax efficient investment for the individual. For a summary of the tax reliefs that are available to the investor, see the Enterprise investment scheme tax relief guidance note.CGT deferral relief allows investors disposing of any asset to defer gains against subscriptions in EIS shares. This is discussed in detail in the Enterprise investment scheme deferral relief guidance note. Under EIS deferral relief, deferred gains are set aside or ‘frozen’ until the occurrence of specified future events. The base cost of the replacement asset (ie the new EIS shares) remains unchanged. This frozen gain crystallises and becomes chargeable in the year of a ‘chargeable event’. Usually, this will be on the sale of the EIS shares. When the EIS shares are sold, there will sometimes be a gain on the shares themselves but, in addition, this disposal will also crystallise the frozen gain.Any profit on the disposal of the EIS shares themselves is likely to be exempt from capital gains tax under the rules discussed in the Venture capital scheme shares guidance note.This guidance note discusses the triggers which cause the capital gain deferred on the subscription for EIS shares to crystallise.Chargeable eventsThe following are chargeable events:•gift of the EIS shares, unless the gift is to the individual’s spouse or
Employee trusts ― implications of disguised remuneration and where are we now?Employee benefit trusts (EBTs) are commonly used to support employees’ share schemes and to provide other benefits to employees in the form of pensions and bonuses.Their use has been significantly affected by the introduction of the disguised remuneration rules. For further information, please see the Disguised remuneration ― overview guidance note. Although the statutory exclusions from those rules cover many of the share scheme-related activities of EBTs, some of their historic uses, such as providing loans to employees or opportunities for wealth creation through long-term investment schemes, have been substantially curtailed.However, the use of EBTs as a vehicle for employee ownership had a welcome boost following the Nuttall report. As a result, new tax advantages were introduced in Finance Act 2014 for employee owners who dispose of their interests in companies to employee ownership trusts (EOTs). The employment tax effects are covered in the Exemption from tax for bonuses paid by qualifying companies guidance note.Why do companies establish EBTs?An EBT is usually established by a company which provides it with assets in the form of cash or shares for the benefit of its employees. The operation of the EBT is governed by the trust deed which lays down the obligations of the sponsoring company, and the powers and duties of the trustees. The trustees
Business asset disposal relief on shares and securitiesBusiness asset disposal relief (BADR), previously known as entrepreneurs’ relief, is a capital gains tax (CGT) relief that allows business owners with chargeable gains on qualifying business assets to pay CGT at a rate of 10%. This relief is available on up to £1m of capital gains for each individual over their lifetime and is available on gains arising to sole traders, partners, shareholders and trusts. Prior to 11 March 2020, the lifetime limit was £10m. Relief applies to all disposals, so BADR should be considered when succession planning involves gifting business ownership, as well as in relatively straightforward sales of a business.The general rules for BADR are detailed in the Conditions for business asset disposal relief guidance note, but this note focuses solely on the application to disposals linked to shares and securities in personal companies or disposals of enterprise management incentive (EMI) shares.Other guidance notes relevant to BADR are:•Business asset disposal relief for sole traders•Business asset disposal relief for partnerships•Maximising business asset disposal relief•Business asset disposal relief (entrepreneurs’ relief) ― trustsHMRC guidance can be found at CG63950P onwards and the relevant legislation is at TCGA 1992, ss 169H–169SH.Disposals of shares or securities qualifying for business asset disposal reliefAn individual may claim BADR on gains arising from shares or securities in a company provided there is a:
Restricted securitiesIntroductionThe application of the restricted securities legislation is complex. This guidance note summarises the key tax implications and looks at some of the practical issues for employers in analysing and handling the potential risks associated with the acquisition of restricted securities by employees and directors in private and unlisted public companies.The definition of securities is found within ITEPA 2003, s 420. It includes, amongst other things, shares (the most common type of security issued in a private company and the focus of this guidance note), loan stock, warrants and units in a collective investment scheme. Key considerationsWhen might the restricted securities regime apply?The restricted securities regime is most likely to be relevant where a director or employee acquires shares at less than market value (disregarding any restrictions on the shares) that are subject to compulsory transfer arrangements. For example, the director / employee is required to sell the shares on leaving the employment for less than the market value at that time.Restrictions are not limited to those contained in the company’s Articles of Association. They can also include restrictions contained in any ‘contract, agreement, arrangement or condition’. For example, restrictions contained in shareholders agreements would be caught under the legislation. Restrictions of any nature are covered if their effect is to decrease the market value of the shares. They include:•good and bad leaver clauses that determine the price an employee receives on termination of employment•forfeiture of shares if performance conditions are not met•requiring the consent
Transactions in securities and the Phoenix TAAR on a company sale or winding-upThe transactions in securities (TiS) legislation is anti-avoidance legislation aimed at situations where close company shareholders have engineered a disposal of shares to obtain a beneficial capital gains tax (CGT) rate, ie avoid income tax, on specified transactions.The targeted anti-avoidance rule (TAAR) aims to combat cases of ‘phoenixism’ and applies to certain distributions made in the process of winding up companies on or after 6 April 2016. Prior to April 2016, such transactions were usually covered by the TiS regime. The TAAR was introduced to provide absolute certainty of treatment for such transactions and in practice when there is a company winding up the TAAR may be in point rather than the TiS.This guidance note discusses some of the TiS and TAAR issues that may be encountered on a sale / winding-up of a business. It is not intended to be comprehensive analysis of all the relevant statutory provisions. For details of the relevant legislative definitions and other provisions, see the Transactions in securities and the Phoenix TAAR ― outline of regime guidance note.When will the TiS provisions apply?The TiS legislation targets schemes that aim to avoid tax by turning income profits (taxed at 45%) into capital gains (taxed at 20%, or 10% if business asset disposal relief (previously known as entrepreneurs’ relief) applies). Note there are also TiS rules for corporate tax purposes. These are to all intents and purposes redundant as companies are
Property investment or trading?OutlineThe distinction between dealing or development and investing in property is crucial to many areas of tax law. Often it will be quite clear cut as to whether a person is trading or investing in land. A person buying property to let out long term will be making a property investment, whereas someone buying a property to refurbish and sell will most likely be trading as a property dealer or property developer. However, where does one draw the line between activity regarded as dealing and activity looked upon as investment?First, it is important to realise that the tests for whether one is dealing in property or making a property investment are the same as for any other trade. Therefore, a good place to start is to look at the ‘badges of trade’.The badges of trade are not a statutory concept, but are a recognised set of criteria developed by the courts to identify when a person is undertaking a trading activity. They can be applied to property transactions just as they can to a variety of other activities.It is not necessary for a transaction to have all of the badges in order to be regarded as dealing or developing and clearly some badges will carry greater weight than others, depending on the facts of the case. Indeed, in some cases the existence of one single badge can be enough for the person to be trading. The situation will therefore always need to be considered carefully in
BPR and changes to the business structureBPR and incorporationIn the current tax climate, many sole traders, partnerships and limited liability partnerships (LLPs) are seeking to incorporate to shelter their surplus trading profit from penal income tax rates.However, when an existing unincorporated business transfers its trade and net assets to a new company, there may be a loss of business property relief (BPR) depending on how the incorporation was structured.It is important to note that if a business owner makes a chargeable transfer (which could be on their death) at the time the various assets are sold to the new company, the normal BPR denial for binding contracts for sale will not apply (see the BPR overview guidance note). This section considers the inheritance tax BPR implications for each of the main methods of incorporating an existing qualifying trading business.For further guidance on incorporating a business, see the Introduction to incorporation guidance note in the OMB module, and other notes in that sub-topic.Incorporation of business in exchange for sharesSuch incorporations will normally be within TCGA 1992, s 162 (which offsets the consequent gains on chargeable assets, such as goodwill, against the market value base cost of the shares issued in exchange). The mechanism for the deferral of the capital gain is discussed in the Capital gains tax implications of incorporation guidance note in the OMB module.From a BPR perspective, the new consideration shares in the company should often immediately qualify for BPR as they will be considered to be replacement
Non tax-advantaged share option schemesSummaryAs with any other discretionary option plan, a non tax-advantaged share option plan involves the granting of a specific number of options to an individual. These options provide that the individual can, at an agreed date or point in time, acquire a given number of shares (the underlying shares) for a fixed price. These share schemes used to be known as ‘unapproved’ share option plans.Given that there is both no up-front cost to acquiring the options and no requirement for the individual to pay over any monies unless the underlying shares increase in value, there is little risk attached to the receipt of options. As a result, the tax treatment and tax rates applicable will often appear to be very similar to cash bonuses.Key considerationsGrant of optionsThe terms of the options need to be set out in a suitable legal document known as ‘the Rules’. The Rules govern all pertinent matters between the company and employee and, given the tax complexities that can occur in such arrangements, a suitable and up to date precedent should be obtained.One of the key terms is the price that the individual has to pay to acquire the share, known as the exercise price. As no income tax charge arises when the non tax-advantaged options are granted, no matter the exercise price, the exercise price can be set at any figure from zero upwards. Under a non tax-advantaged plan, there is no limit as to how many options are granted.
Non tax-advantaged share awardsSummaryHMRC tax-advantaged share award plans are limited in size, tightly defined and, broadly, require awards to be offered to all staff. See the Share incentive plans guidance note. Accordingly, any awards outside this type of plan are considered non tax-advantaged (previously known as ‘unapproved’).Typically, share awards are seen in the reward packages of senior executives and key employees, often as part of a wider long-term incentive plan (LTIP).Although there may be some similarities between awards of shares and grant of options, the key difference is that with options, the actual ownership of the share is delayed until the option is exercised. In addition to practical considerations (such as the clock for entrepreneurs’ relief usually starting from the date of share acquisition, see the Conditions for business asset disposal relief guidance note), it may be considered to be a better incentive for employees to have ownership from an earlier date.Acquisition of the sharesThe first consideration with any share award is to establish the market value of the shares being acquired, see the Fiscal
Comparison of share sale and trade and asset saleStructuring the sale of a businessA purchasing company can acquire a business in one of two ways, either by purchasing the trade and assets or by purchasing the shares in the company operating the business.Commercially, purchasers may prefer to buy the trade and assets. This is because they have the ability to negotiate exactly which assets are acquired, and which liabilities are left behind.Conversely, if the shares in the company are acquired, the company’s entire history is transferred to the new owner, including its liabilities. The due diligence process, which is carried out prior to completion of the acquisition, aims to identify potential liabilities and obligations, and make recommendations to the purchaser as to how to deal with them or mitigate them. This might be by way of price adjustment, underpinned by structure change, or detailed warranty and indemnity provisions in the purchase agreement. A due diligence exercise will not only look at potential tax liabilities, but also covers legal, commercial and financial matters.On the other hand, the preferred option for vendors is often a share sale. Attractive reliefs may be available, depending upon the
Discover our 30 Tax Guidance on Business asset disposal relief
Speed up all aspects of your legal work with tools that help you to work faster and smarter. Win cases, close deals and grow your business–all whilst saving time and reducing risk.
**Free trials are only available to individuals based in the UK. We may terminate this trial at any time or decide not to give a trial, for any reason.
""These days you can’t just risk using a standard search engine but need a proper research tool like TolleyGuidance.""
Access all documents on Business asset disposal relief