How do you claim Business Asset Disposal Relief? Andy Gibbs ATT CTA of TaxAssist Accountants explains what Business Asset Disposal Relief is and who is eligible for it.

What is Business Asset Disposal Relief?

Business Asset Disposal Relief (BADR) (formerly ‘Entrepreneurs’ Relief’) is a valuable Capital Gains Tax (CGT) relief available to business owners when they make a disposal of relevant business assets.

BADR is a key area of tax planning and can have the effect of charging the first £1 million of qualifying capital gains at an effective tax rate of just 10 per cent. Confirming eligibility for BADR should be a key exit planning consideration for most business owners.

Who is eligible for Business Asset Disposal Relief?

BADR will generally be available to:

• sole traders or partners when they sell the whole or (in some cases) part of their trading businesses
• trustees when they make a disposal of business assets, in certain specific circumstances
• employees and company directors who dispose of qualifying shareholdings acquired under an enterprise management incentive (EMI) share option scheme
• company directors and employees when they dispose of shares in what is known as their personal trading company

Company directors and employees

Several key conditions must be met for BADR to be available and care is needed to ensure a claim can be made. The following main conditions must be met throughout a period of two years up to the date you dispose of your shares or the date the company ceases to trade:

1. The company must be a trading company or the holding company of a trading group. If there are elements of non-trading activities, professional advice may be needed to determine if a claim may be made.
2. The shareholder must be an officer or employee of the company or of another company in the same group.
3. The shareholder must hold at least 5 per cent of the ordinary share capital and be able to exercise at least 5 per cent of the voting rights. They must also either be entitled to at least 5 per cent of the distributable profits and 5 per cent of the assets available on a winding up, or, would be entitled to at least 5 per cent of the proceeds, assuming that a disposal of the whole of the ordinary share capital of the company were to take place.

It’s important to note there is no aggregation of spousal/civil partnership share ownership. There may be situations where neither spouse/civil partner will qualify for the relief individually, due to not having enough shareholding which meets the above 5 per cent tests. However, it may be possible to transfer shareholdings to allow a successful claim.

In addition to a claim for BADR on the disposal of a business interest, BADR may also be available on an 'associated disposal'. This is the disposal of a business asset used by a qualifying company (or group of companies) of the individual or a business asset used in a partnership in which the individual is a partner:

• For example, where an individual personally owns premises that are used by his personal company, it may be possible to claim BADR if the property is sold in conjunction with the sale of at least 5 per cent of the shares or securities. In this instance, there must not normally be a significant interval of time between the associated disposal of the business premises and the material disposal of shares to which it relates.

Additional restrictions on obtaining BADR on an associated disposal apply. In situations where the asset has not been used in the business throughout its period of ownership, relief will be restricted. Equally, if only part of the asset had been used in the business or if rent has been charged by the individual to the business for the use of the asset, BADR may also be restricted.

Generally, the personally held asset must also have been used in the business for at least 2 years and must have been owned for 3 years prior to the disposal.

How much Business Asset Disposal Relief can you claim?

Qualifying gains up to the lifetime limit applying at the time you make your disposal are eligible for BADR. The lifetime limit was reduced to £1 million for qualifying disposals made on or after 11 March 2020. Where you exceed the lifetime allowance, excess gains will be taxable at the normal rate of CGT.

How do you claim Business Asset Disposal Relief?

It’s important to be aware that relief is not automatic, and it must be actively claimed. The claim to HMRC must be in writing by the first anniversary of the 31 January following the end of the tax year in which the disposal takes place. For instance, in the tax year ending on 5 April 2021, the time limit for making a claim is 31 January 2023.

You can make a claim for BADR either through your Self Assessment tax return or by making a standalone claim and typically claims will be made on personal tax returns.

It should be noted that the above information is intended to inform rather than advise and is based on legislation and practice at the time of publication. Taxpayers’ circumstances do vary, and individuals should consider taking professional advice to determine their eligibility to BADR.

About the author

Andy Gibbs ATT CTA is Group Technical Manager at TaxAssist Accountants, who is a qualified Chartered Tax Adviser (CTA) and holds the STEP Advanced Certificate in Trust and Estate Accounting. He has dealt with both tax compliance and tax advisory projects across a range of industry sectors. 

See also

Company profiles

What is SME Research and Development tax relief?

Research and Development expenditure credit (RDEC) explained

How can Patent Box reduce your Corporation Tax?

Five tax breaks SMEs can benefit from in the UK

Find out more

Business Asset Disposal Relief (GOV.UK)

Self Assessment tax return (GOV.UK)

Image: Getty Images

Publication date: 27 August 2021

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.