How can Business Asset Disposal Relief be useful for business owners?

If you’re looking to sell your business, you may be concerned about paying a high rate of tax and potentially losing a significant portion of the profits from your company.

Business Asset Disposal Relief (BADR) may help you to keep more of your profits when you sell. This relief can reduce the level of Capital Gains Tax (CGT) you need to pay when selling your business and its assets.

If you are planning to sell your business, read on to learn about using BADR.

Reducing your Capital Gains Tax bill

BADR, formerly known as “Entrepreneurs’ Relief”, is a relief from CGT for business owners when selling all or part of a business.

You do have a CGT exempt amount before tax is due, which is £12,300 in the 2022/23 tax year. However, gains above this amount could be subject to CGT.

In the 2022/23 tax year, the CGT rates are:

• 10% (18% on property that isn’t your main residence) for gains falling within the basic rate band when added to income
• 20% (28% on property that isn’t your main residence) for gains falling above the basic rate band when added to income.

So, if you’re a higher- or additional-rate taxpayer selling business assets, you could face a bill of up to 28% if you make gains on property and you have no remaining CGT exempt amount.

Meanwhile, BADR works by allowing you to pay only 10% CGT on qualifying assets rather than the 20% or 28% rate of CGT if you’re a higher- or additional-rate taxpayer.

You can use BADR on gains up to a lifetime allowance of £1 million. So, for the first £1 million, BADR will let you pay 10% CGT rather than 20% or even 28%, which could potentially save you £100,000 or more.

Business Asset Disposal Relief vs Entrepreneurs’ Relief

Before the Chancellor presented the 2020 spring Budget, there were whispers that Entrepreneurs’ Relief could be abolished.

Thankfully, however, the Finance Act 2020 saw Entrepreneurs’ Relief rebranded to BADR from 6 April 2020.

BADR works in largely the same way as Entrepreneurs’ Relief – although Rishi Sunak reduced the lifetime allowance for relief from £10 million to £1 million.

Qualifying for Business Asset Disposal Relief

BADR can be used if you’re a business owner selling all or part of your business. Certain business assets may be eligible for BADR when you come to sell them, and it is also available to individuals who are selling shares from their personal trading company.

To qualify for BADR, you could be a sole trader, business partner, or a certain type of company shareholder. Trustees may also sometimes qualify for relief. BADR is not available for capital sale within a company.

If you’re selling your business – or a part of it – you’ll need to have been a sole trader or business partner for at least two years prior to the sale. In the same way, business assets that are being disposed of also need to have been owned for a minimum of two years, if they’re to qualify for BADR.

If you’re closing your business, you will need to dispose of any assets within three years in order to qualify for BADR.

If you’re an individual selling company shares, you’ll only qualify for BADR if your business is a “personal trading company”. To be eligible, you must be an office holder or employee of the company, and own a minimum of 5% of the ordinary share capital.

As the shareholder, you must also be entitled to at least 5% of the profits if the company is sold or closed. The two-year rule applies here as well – you must have met these conditions for at least two years prior to the sale.

How to calculate Business Asset Disposal Relief

To work out the BADR when disposing of a business:

• Calculate total taxable gains from the business sale
• Subtract losses
• Deduct any of your remaining CGT exempt amount (£12,300 in the 2022/23 tax year) still available to you
• Pay 10% of this remaining figure.

Remember: you can only claim BADR on up to £1 million of gains. Any gains over this amount will be subject to your CGT rate, depending on your marginal rate of Income Tax.

How to claim Business Asset Disposal Relief

You can claim the relief as part of your self-assessment tax return. Alternatively, you can fill in and submit a BADR claim form.

The deadline to claim BADR is by the first anniversary of the 31 January after the tax year in which the disposal took place. In other words, if you were to sell your business in July 2022 (that is, during the 2022/23 tax year), you would need to submit your BADR claim by 31 January 2025.

Business Asset Disposal Relief can significantly reduce your tax bill

Here’s an example of how BADR can reduce your tax bill.

Sandra is a sole trader who sells her business in the 2022/23 tax year. This brings Sandra £3 million in capital gains across assets and shares held in the business. As she is a higher-rate taxpayer, and assuming she has already used up her annual CGT exempt amount, Sandra could have to pay a substantial tax bill.

As Sandra meets the eligibility criteria for BADR, she can apply for the relief. She will now only need to pay 10% CGT on the first £1 million from her business sale, which means paying £100,000 in tax.

Sandra has now maxed out her £1 million lifetime allowance for BADR, so the remaining £2 million profit will be subject to the higher rate of CGT. Sandra has not made any gains on property in her sale, so will owe 20% CGT on this portion, meaning she will pay £400,000 in tax.

Sandra’s total tax payment is £500,000, but BADR saved her from paying £100,000 in Capital Gains Tax.

Seeking professional advice

BADR can be a useful way for you to reduce a potential tax charge. However, the rules can be complex and so working with a financial professional could help you avoid any tax pitfalls and could potentially save you money.

If you’d like to speak to an expert about BADR, then please do get in touch with us at Rosebridge.

Email enquiries@rosebridgeltd.com or call 01204 300010 to find out how we can help you.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.