Business asset disposal relief in a nutshell
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.
The relief is available for certain qualifying disposals and this overview gives brief details of the qualifying conditions.
What types of disposals qualify for BADR?
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.
Do all disposals of shares qualify for relief?
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 company must be a trading company or the holding company of a trading group to qualify and the individual making the disposal is required to be an officer or employee of the company or another company in the group. All these tests need to be met for at least two years before the disposal.
What is a trading company?
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.
Can BADR still apply if the company has stopped trading?
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.
What about assets owned personally and used by the business?
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.
How is BADR calculated?
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.
Individuals can claim BADR on multiple occasions up to the threshold limit which is currently £1m of capital gains. Gains in excess of the threshold are charged at 10% or 20% (18% or 28% if the gain is on residential property or carried interest) subject to any annual exempt amount and depending on the availability of the individual’s basic rate band.
Is BADR available on enterprise management incentive (EMI) shares?
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.
How is BADR claimed?
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).
The gains are reported on the capital gains summary supplementary pages to the tax return in accordance with the type of asset sold. Calculations of the gains must be attached and submitted with the tax return.