1. Introduction to Business Asset Disposal Relief (BADR)
Business Asset Disposal Relief (BADR) is a tax relief program in the UK that allows qualified business people to pay a reduced CGT Capital Gain Tax for disposing or selling all of their businesses. This relief incentivises small business owners and entrepreneurs to grow their businesses by offering tax benefits while transferring or exiting ownership.
Brief Overview of BADR
BADR applies to people who meet certain criteria, such as being involved in a partnership or owning shares in the company. If you qualify for disposed of assets, the owner will benefit from a lower % CGT rate of 10%, up to a lifetime limit of £1 million. There is no such contrast in the standard rate of CGT, which can be as high as 25% for higher taxpayers.
BADR supports the entrepreneurial ecosystem by reducing the tax burden on entrepreneurs and encouraging the growth and sale of successful businesses. Assets that qualify include partnerships, business premises, and shares.
History and Updates (formerly Entrepreneurs’ Relief)
BADR was formally known as Entrepreneur Relief ER until the changes were made after the 2020 budget. The major change was the reduction of the lifetime allowance from £10 million to £1 million. This change was for redirecting tax relief towards genuine small business owners while curbing abuse of the relief by larger business owners.
This change reflected the government’s desire to balance incentives for entrepreneurship with responsibility. The name changed, and the limit was reduced, but the core purpose of BADR remains to incentivise entrepreneurship. The rules remained mostly the same as those for ER, including the types of eligible assets and qualification criteria.
The evolution of BADR has persisted, with heightened inspection to guarantee that it serves legitimate small company owners. This implies that people must be aware of certain requirements, like owning shares for at least two years before a sale and having an active role in the company as an employee or director.
2. Who is Eligible for Business Asset Disposal Relief?
Eligibility for Sole Traders and Partnerships
Business partners and sole proprietorships can qualify for BADR if they dispose of or sell their business assets. To qualify, they must have owned the company for at least two years before the disposal date.
This covers the sale of the whole company, a portion of the company, or partnership shares. If assets like buildings or machines are sold as part of the firm closure or sale, BADR also applies to those purchases.
Eligibility for Shareholders and Company Employees
Shareholders in a limited company can apply for BADR if they hold at least 5% of the voting rights or company shares. This is known as the personal company. This means that the individual must be an officer or employee of the company. This condition shows that only individuals actively involved in the business can benefit from such relief.
Conditions for Personal Companies
For a personal firm to be eligible for BADR, it must fulfil certain requirements:
- The individual must own a minimum of 5% of the company’s share capital and voting rights.
- The candidate must have worked for the company for at least two years as an employee or officeholder (secretary or director).
- To be eligible for the relief, these requirements must have been met at the time of the disposal and in the two years preceding it.
Rules for EMI (Enterprise Management Incentive) Shares
BADR is an Enterprise Management Incentive that applies to shares acquired through the EMI scheme. It is available to individuals holding less than 5% of the company shares. To be eligible, the EMI options must be given at least two years before selling the shares.
Additionally, the business must fulfil the requirements for an approved EMI plan. Smaller companies can recruit and retain staff with the aid of EMI programs, while BADR gives a 10% tax rate on profits from the sale of EMI shares.
3. Qualifying Assets for BADR
Disposal of Whole or Part of a Business
BADR can be claimed when a business owner disposes of all or part of his business. To qualify, the business must have been owned for at least two years. This applies to people like partners, sole traders, and company shareholders disposing of significant stakes in their business.
Disposal of Shares and Securities
If a shareholder holds at least 5% of the shares and voting rights for two years, they are eligible to claim BADR when they sell their own company’s shares. During this time, the person must also be an officer or employee of the business.
Requirements for Material Removal:
Before disposal, the taxpayer must have worked for the company (or group) for at least two years as an employee or director. Part-time workers are also eligible.
The business must be the taxpayer’s own corporation, which means it must own at least 5% of the voting rights and common share capital. Furthermore, it must be entitled to either 5% of the proceeds from the sale of the company’s total ordinary share capital or 5% of the distributable profits and assets upon winding up.
For the corporation to pass the 20% trading test, fewer than 20% of its operations must be in non-trading sectors like real estate or investments.
Disposal of Assets Used in a Ceased Business
Even after a company closes for business, BADR may still apply to the sale of its assets, including real estate and machinery, provided the sale occurs within three years after its closure.
Special Conditions for Trustees
Trustees are eligible to apply for BADR on behalf of beneficiaries, provided that the beneficiaries would have been eligible for the relief had they been the direct owners of the assets. The beneficiary and the trust must both fulfil the requirements.
4. Conditions for Claiming BADR
2-Year Ownership Requirement
To claim BADR, an individual must have owned their qualified assets or business for two years before the date of disposal or sale.
The 5% Rule for Shares and Voting Rights
To qualify for BADR, shareholders must have 5% of the company’s voting rights or shares and be employees or officers of the company during the two-year qualifying period.
What Qualifies as a Trading Company?
A company qualifies as a trading company if its primary activities are commercial, such as selling services or goods, rather than holding non-trading assets or investing in them. To qualify for BADR, at least 80% of company operations must be connected to trade.
Rules for Post-Cessation Sales (3-Year Window)
Owners of closed firms may continue to collect BADR from the sale of their assets for a maximum of three years following the closure of the business. This allows previous company owners to get relief when they sell assets like real estate or machinery that was employed in the closed business.
5. Additional Considerations and Scenarios
Dilution of Shareholding and Election to Preserve BADR
A shareholder may choose to treat a drop in their stake as a disposal if it brings their ownership below the 5% threshold due to the issuance of new shares. Even if they keep the shares, this election enables them to lock in the relief at the dilution point.
BADR on Associated Disposals
In addition, a taxpayer may be eligible for BADR on a related disposition of assets utilised in the business if they have made a major or “material disposal” of business assets as part of their retirement from a firm. Partners or other individuals who own securities or shares in a personal firm are eligible for this exemption.
Guidelines for Related Disposals:
- There must be a material disposition of the company, usually with a minimum 5% ownership drop. This pertains to shareholders (5% of share capital or securities) and partnerships (5% of partnership assets).
- Although they can still work for the company, the disposal must be a component of the person’s resignation from ownership.
- Prior to disposal, the asset had to have been owned by the person for a minimum of three years and used in the business for a minimum of two years.
- Restrictions can be in place if the business did not use the asset for the whole ownership term or if the business was required to pay rent for using the asset.
- These rules make sure that those who gain from related disposals are actively giving up ownership while adhering to strict usage and time constraints.
BADR for EMI Shares
If a holder of shares obtained under an Enterprise Management Incentive (EMI) plan holds less than 5% of the company’s shares, they may still be eligible for BADR. The corporation must fulfil the qualifying requirements for EMI schemes, and the EMI options must have been granted at least two years before the sale of the shares.
6. Limitations of BADR
£1 Million Lifetime Limit
One of BADR’s main drawbacks is the £1 million lifetime cap on gains eligible tax relief. Individuals are not eligible for additional compensation if they have already received the relief on disposals reaching £1 million. This ceiling was dramatically lowered from £10 million in 2020 to better focus the relief on smaller business owners. It applies to all eligible disposals made throughout a person’s lifetime.
Restrictions for Non-Trading Assets and Property Businesses
Non-trading assets, such as investment properties or assets held by property enterprises, are not eligible for the relief provided by BADR, which is exclusively accessible for trading businesses. Businesses that rely heavily on real estate rentals or other investment-related operations for revenue might not fit the definition of a trading company, which would restrict access to BADR.
7. How to Claim BADR
Claim Process and Deadlines
In order to be eligible for BADR, people must include the qualifying disposal on their self-assessment tax return for the tax year in which the sale or disposal took place. It is crucial to make the claim for BADR very evident in the pertinent return section. Supporting information, like the sale price and the dates of ownership, can also be necessary.
Examples of Claim Deadlines
It is necessary to submit claims for BADR within a year of the tax year in which the disposal occurred, on January 31st. For instance,
- The deadline to claim BADR would be January 31, 2025, if the disposal occurred in the 2022–2023 tax year.
- If a disposal occurs in the 2023–24 tax year, a BADR claim needs to be submitted by January 31, 2026.
8. Planning Opportunities for BADR
Maximising Relief for Spouses and Civil Partners
Transferring eligible business assets to a spouse or civil partner before disposal is one efficient strategy to optimise BADR. After that, both people are eligible to apply for relief, which doubles the lifetime cap to £2 million. Couples can maximise their BADR claim with this technique, which also guarantees that they will both benefit from the 10% Capital Gains Tax rate.
Tax Planning Tips for Businesses and Individuals
Businesses and individuals can optimise their BADR claims with careful tax planning. To be eligible, shares or assets must fulfil the two-year ownership requirement and keep their shareholding level at five per cent. To maximise the relief available, business structures should be reviewed, and disposal timing should be considered.
9. Common Mistakes to Avoid When Claiming BADR
- Not Fulfilling the 2-Year Ownership Stipulation: To be eligible, you must have held the company or the shares for at least two years before the disposal.
- Not Owning 5% of Shares and Voting Rights: To be eligible, a shareholder must own 5% or more of the company’s shares and voting rights.
- Misclassifying the Business: BADR is only available to trade enterprises. Make sure your company’s main focus is not non-trading pursuits like real estate investing.
- Ignoring the Claim Deadline: Remember to submit your claim within a year after the disposal’s tax year ends on January 31.
- Ignoring Spouse or Civil Partner Relief: You may miss out on significant tax benefits if you do not take advantage of spouse or civil partner relief.
10. Conclusion
Why BADR is Still Valuable Despite Recent Changes
In conclusion, Business Asset Disposal Relief (BADR) offers a lower 10% Capital Gains Tax rate. It’s still a useful tax break for business owners despite recent adjustments, such as the lowering of the lifetime maximum. It is a crucial instrument for small business owners and entrepreneurs to keep more of their hard-earned profits since it still offers considerable tax savings for those wishing to sell or close their enterprises.