What Is Business Asset Disposal Relief?

Many entrepreneurs search for legitimate accounting strategies to reduce expenses and maximise profits, including avoiding large tax bills. Business Asset Disposal Relief (BADR) is one way to do this without getting on the wrong side of the law. The Finance Act changed its name from the Entrepreneurs Relief (ER) in 2020.

It is a form of tax relief that helps you boost your financial gains by lowering the amount of Capital Gains Tax or CGT you pay on disposed business assets. This tax relief incentivises business owners and encourages them to grow and invest in their businesses. This article explores BADR, discussing its essentials, significance, benefits for entrepreneurs, and impact on capital gains. 

What Does Disposing of an Asset Mean?

The ‘disposal’ here does not refer to the meaning in the literal sense because it doesn’t apply to only assets that are being sold. When you are disposing of an asset, it can mean that you are:

  • Selling all or part of an establishment where you’re a business partner or the sole trader.
  • Selling shares or securities, such as loan stock.
  • Selling assets that were used in the business at the time the business ceased operations.
  • Selling business assets held by a trust.
  • Giving away your business parts or shares.
  • Swapping an asset for something else that typically has a higher value.
  • Receiving compensation for a stolen or damaged asset.

However, to qualify for BADR, the disposal must be a ‘material disposal,’ there are different conditions for what counts as material disposal for each type of business asset. You can find extensive information on the Gov.uk Business Asset Disposal Relief page.  

How Much Does BADR Reduce Your Tax Bill?

Generally, any form of tax relief helps reduce the money you pay to HM Revenue & Customs (HMRC). In the case of BADR, you are charged a lower capital gains rate than the rate payable on gains made on qualifying disposals. It’s a significant reduction for higher-rate taxpayers, as they pay a CGT rate of 10%, while the standard one is 20%.

Eligibility Criteria To Claim BADR Relief

To be eligible for BADR relief, you must meet certain criteria:

  1. The business or company must be operating as a trading company. 
  2. For sole traders or partnerships, the company need to have been in business for two years minimum before ceasing operations. 
  3. A shareholder must have worked as an employee or office holder of the company for two years minimum up to the date you decide to sell the shares.
  4. As a shareholder for two years, you must have held not less than 5% of the company’s total shares and 5% of voting rights in the company in that period.

According to HMRC, some evidence of working in the business suffices to identify an individual as an employee or officer, without regard to hours or salary. Non-executive directors and secretaries are also regarded as officers.

Shares From an Enterprise Management Incentive (EMI)

BADR is more generous with regard to shares acquired through an Enterprise Management Incentive (EMI). The differences where there are EMI options include:

  • There is no requirement to hold at least 5% of the shares and voting rights.
  • You don’t need to have been a shareholder for two years. But you must have had the option to buy the shares at least two years before selling them.

What Happens if the Company Ceases To Be a Trading Company?

If the company stops operating as a trading company, you can still claim BADR if you sell your shares within three years from when the company ceases its operations. 

Which Types of Business Can Claim BADR?

Only individuals can claim BADR, and as a result, there is a limit to the types of business structures that are eligible. They include:

  • Sole trader operations
  • Joint ventures
  • A personal company or PSC
  • Partnerships 
  • Trusts that hold business assets 

How Do You Claim BADR?

The process is quite simple. You can claim it:

  • through your Self-assessment tax return.
  • by completing Section A of the BADR helpsheet.

If you’re unsure how to do this, you can contact professionals to help you handle this.

What Is the Limit on the BADR Amount You Can Claim?

You’re allowed to claim BADR as many times as possible. However, every individual is entitled to claim a maximum amount of  £1 million in BADR throughout their lifetime for disposals after 11 March 2020. If you have made previous disposals before this date, those disposals will be considered to calculate your lifetime limit. If you eventually surpass the lifetime limit, you’ll pay the regular rate of Capital Gains Tax on excess gains.

Spouses and civil partners are regarded as separate individuals, so they can maximise their reliefs by making independent claims. However, it is advisable to seek professional advice before doing this.

A business owner can not claim this scheme on their investments or non-business assets.

What’s the Deadline to Apply for BADR?

If you’re eligible, you must put in a claim within the first year after the 31st of January that follows the tax year when you disposed of the asset. So, if the tax year when you sold or closed your business is 2022-2023, the deadline to claim this relief is 31st January 2025.

BADR Alternatives

Depending on the size of the asset you want to dispose of and due to the lifetime limit, you may want to consider other schemes. These alternatives include:

  • Investors’ Relief 
  • Employee Ownership Trusts
  • Seed Enterprise Investment Schemes (SEIS) 

Benefits of BADR for Entrepreneurs

This scheme can benefit entrepreneurs in the following ways:

  1. It does not affect other schemes like capital allowances, VAT, and income tax relief.
  2. It maximises your return when you dispose of a business or business assets.
  3. It keeps you as tax-efficient as possible.

Conclusion

BADR is a valuable tax relief opportunity for business owners looking to sell or dispose of assets. Understanding the rules and regulations can be complex, but professional help can be beneficial. If you’re unsure where to begin, You can contact Taxace. Our team of experienced accountants specialise in handling BADR and all HMRC-related matters.

Contabila UK - Founder and CEO -TaxAce - Iurie Bivol

Iurie Bivol

Director TAXACE LTD

Entrepreneur and accountant with 15 years of experience in the UK.

Contabilitate UK - Senior Tax Assistant - Alina Costreie

Let's talk accountancy services for business.

Like what you see? Get in touch today to see how we can help you save time and stress less.