What is Business Asset Disposal Relief?

Business owners who sell all or part of their business can benefit from paying less Capital Gains Tax by using Business Asset Disposal Relief.

Business Asset Disposal Relief (also known as BADR) was previously known as Entrepreneurs’ Relief.

Using BADR, business owners can reduce their Capital Gains Tax (also known as CGT) bill when they sell all or part of their business.

Capital Gains Tax is the tax payable on the profit of an asset that is sold and has increased in value.

Business Asset Disposal Relief explained

Business Asset Disposal Relief only applies to individuals disposing of business assets.

It does not apply to companies.

Those who qualify for BADR pay 10% Capital Gains Tax when selling all or part of their business.

Without the relief, CGT is up to 28%.

There was previously a £10 million lifetime of gains through BADR when it was known as Entrepreneurs’ Relief.

The lifetime limit was lowered to £1 million, and the relief was renamed in the March 2020 Budget.

What assets qualify for Business Asset Disposal Relief?

Business assets that qualify for Business Asset Disposal Relief are:

• all or part of a business run by a sole trader or business partners
• shares or securities in a company
• shares from an Enterprise Management Incentive (EMI).

Who can claim Business Asset Disposal Relief?

If you’re selling all or part of your business, you must be the following to qualify for BADR:

• a sole trader or business partner for at least two years
• you’ve owned the company for at least two years
• been trading for at least two years before selling or the business ceasing.

If you’re closing your business, you must also dispose of the business assets within three years.

Those selling shares or securities qualify for BADR if the following apply for at least two years until the date the shares sell:

• no less than 5% of the total shares are to be held
• you’re an employee or office holder of the company (or one in the same group)
• the company’s main activities are in trading, or it’s the holding company of a trading group.

Read the complete government guidance on eligibility for Business Asset Disposal Relief.

How to claim Business Asset Disposal Relief

You can claim BADR using a Self Assessment tax return or by completing section A of the Business Asset Disposal Relief help sheet.

Claims for BADR must be made by the 31^st of January, one year from the end of the tax year in which the business disposal took place.

Under the current rules, deadline dates are as follows:

BADR has a lifetime cap of £1 million of gains.

You can make several claims up to the £1 million limit.

If you exceed the £1 million limit, you will pay the regular rate of CGT.

If all your gains qualify for Business Asset Disposal Relief, the government provides the following instructions for working out how much Capital Gain Tax you will pay:

• work out the gain for all qualifying assets
• add together the gains (and deduct qualifying losses) to work out the total taxable gain eligible for BADR
• you’ll pay 10% tax on what’s left.

To ensure you receive the full amount of relief you are entitled to, you might find it helpful to speak to a professional accountant to help you work out and make a claim for Business Disposal Asset Relief.

What is Investors’ Relief?

Former chancellor George Osborne announced Investors’ Relief in the government’s March 2016 Budget.

Investors’ Relief encouraged more people to invest in unquoted UK businesses that are not eligible for BADR or the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) tax relief initiatives for business investors.

Investors’ Relief means eligible individuals pay 10% Capital Gains Tax instead of up to 28%.

It draws elements from BADR and EIS/SEIS, but it is a separate relief with a separate lifetime limit of £10 million of gains.

It is aimed at external investors rather than an employee or company officers.

The relief applies to the disposal of ordinary shares in a trading company not listed on a recognised stock exchange.

Shares in companies listed on the alternative investment market (AIM) qualify for Investors’ Relief because they are classified as unlisted under the scheme.

To qualify, the shares must have been issued on or after the 17^th of March, 2016 and disposed of on or after the 6^th of April, 2019.

The shares must also have been owned for at least three years at the time of disposal.

The relief does not apply if the shares owner or anyone connected to them is an employee of the company or another company connected to it.

Connected people include business partners, the individual’s spouse, civil partner, brother or sister, or a relative’s civil partner or spouse.

The lifetime gains limit for Investors’ Relief is £10 million, compared to £1 million for BADR.

You must claim HM Revenue & Customs (HMRC) by the first anniversary of 31st January following the end of the tax year in which the qualifying disposal takes place.

You can claim for Investors’ Relief using a Self Assessment tax return.

If that is not possible, you can write to HMRC with the information outlined in the full government guidance for Investors’ Relief.