Business Asset Disposal Relief (BADR), previously called Entrepreneurs’ Relief, is a capital gains tax (CGT) relief intended to incentivise individuals to grow and invest in their businesses. It provides significant tax savings for higher and additional rate taxpayers.
Despite previous and upcoming reductions in its benefits, BADR still offers valuable tax breaks to business owners. It reduces the rate of CGT on qualifying gains from the disposal of business assets, compared to the standard CGT rate. The relief is capped at a £1 million lifetime limit on gains. Taking into account the announcements from the Autumn Budget 2024, the maximum potential savings are as follows:
The relief is available to individuals disposing of their personal businesses or interests in a partnership, as well as directors and employees selling shares in the company (or group of companies) they work for. Trustees may also be eligible for BADR in certain circumstances, although this is not considered further in this guide.
Corporate bodies, such as companies, are not eligible for BADR and, as the relief is targeted at business assets, BADR is not available to taxpayers disposing of investment assets.
One of the issues with BADR is that the rules were developed at a time when the maximum level of relief was much higher, and so the rules are extremely complex when compared to the quantum of tax relief available.
Disposals qualifying for Business Asset Disposal Relief
To qualify for BADR the disposal must be:
- A material disposal of business assets, or
- A disposal associated with a material disposal.
A material disposal of business assets
This applies to most individuals when considering a claim for BADR. There are three types of ‘business asset’ that may qualify for relief:
- Whole or part of a sole trade or partnership business.
- An asset used in a business at the time the business ceases to be carried on.
- Shares or securities (eg loan stock) in a company.
Each of these categories has specific conditions that determine what constitutes a ‘material disposal’.
Whole or part of a sole trade or partnership business
An individual carrying on a trade, either as a sole trader or through a partnership may qualify for BADR on disposing of their interest in the business. Relief will only be available for assets used in the business at the time of the disposal.
To be a material disposal:
- The business must have been owned by the taxpayer throughout the two-year period ending with the date of disposal, and
- The disposal must represent either the whole of the business or, if only part of the business is disposed of, this part must represent a business capable of being carried on in its own right. Consequently, the disposal of a single asset is unlikely to qualify for BADR.
Property rental businesses are not trading and are thus not eligible for BADR, except for those qualifying as furnished holiday lettings (FHLs). Although note that the special rules for FHLs are due to be abolished from 6 April 2025.
Property development and land dealing businesses may be trading and may therefore qualify for BADR.
Assets used in a business at the time the business ceases to be carried on
In certain circumstances (often for sole traders), there is a delay between the cessation of a business and the disposal of the assets used within the business. In this scenario, BADR may be available on the sale of the assets if the following material disposal conditions are met:
- The business has been owned by the taxpayer throughout the two-year period before its cessation, and
- The asset is sold within three years of the business ceasing.
To qualify for relief, the asset only needs to have been in use by the business at the time of cessation, not necessarily throughout the required two-year ownership period for the business.
Shares or securities in a company
BADR is available to directors and employees selling shares or securities in the company (or group of companies) they work for.
The relief is restricted to trading companies and groups, meaning that shares and securities in companies with ‘substantial’ investment-related activities (such as most family investment companies) will not qualify for BADR.
To qualify as a material disposal, the following conditions must be met throughout the two-year period ending with the date of disposal:
- The taxpayer must be an employee or director of the company or of another company within the same group. There is no minimum hours requirement, so part-time employees can qualify for the relief.
- The company in which the shares (or securities) are held must be the taxpayer’s ‘personal company’. This means the taxpayer must hold at least 5% of both the ordinary share capital (based on nominal value) and voting rights of the company, and either:
- Be beneficially entitled to at least 5% of the company’s distributable profits and 5% of the assets on a winding up available to equity holders, or
- Be entitled to at least 5% of the proceeds on the sale of the company’s entire ordinary share capital (in determining whether this test is met at any time during the two-year period, the whole of the ordinary share capital is deemed to be sold at its market value on the last day of that two-year period).
- The company must be a trading company or holding company of a trading group.
- The legislation defines a trading company as one which is ‘carrying on trading activities whose activities do not include, to a substantial extent, activities other than trading activities’.
- Activities other than trading activities will include any investment-related activities such as property businesses and investment portfolios.
- For many years HMRC considered a ‘substantial extent’ to mean ‘more than 20%’. In practice, the 20% test was applied to various criteria and depended on the facts and circumstances of each case. Typically criteria such as turnover, asset base, management time and expenditure will be considered. Recent case law has suggested that this 20% rule of thumb is incorrect however, and thus the position of businesses which include non-trading activities is unclear.
Additional considerations for BADR
- The rules are relaxed for individuals holding Enterprise Management Incentive (EMI) shares acquired through an EMI option. BADR is available for EMI shares where the company is not the taxpayer’s ‘personal company’ as long as the option was granted at least two years before the disposal (eg the taxpayer does not need to have either physically held the EMI shares for at least two years before disposal or meet the 5% personal company tests above). This means exit-only EMI options, where the option is exercised and the EMI shares acquired just before a sale, can potentially qualify for BADR.
- A taxpayer may no longer qualify for BADR if share issues dilute their shareholding below 5%. In such cases, the taxpayer might be able to elect to preserve their right to BADR on the gain that has accrued up to that point. This gain, chargeable at the BADR rate, can be recognised either at the date of the dilution or deferred until a subsequent disposal of the shares (or securities), provided all other BADR qualifying conditions continue to be met.
- BADR may be available on shares (or securities) if the company stopped trading within the three years before the disposal. The shareholder must meet the BADR qualifying conditions throughout the two-year period up to the date the company stopped trading.
- When a taxpayer exchanges their shares in one company for shares or securities in another company, special provisions treat the exchange as not being a disposal of shares for CGT purposes, deferring any capital gain. If the new shares or securities do not meet the BADR qualifying conditions, it may be beneficial for the individual to elect to disapply this ‘no disposal’ treatment, enabling them to crystallise the gain and benefit from BADR on the share exchange. These rules, particularly as they interact with EMI share options, are extremely complex and should be considered carefully when planning a transaction.
- As mentioned above, BADR can apply to shares and securities held in trading companies. Since the 5% ‘personal company’ tests include rights attributable to ordinary share capital and voting rights, holding securities (eg loan stock) on their own would not typically qualify for BADR. However, if these securities are held alongside ordinary shares that meet the 5% tests, the securities themselves might also qualify for BADR.
Associated disposals
A taxpayer who has made a ‘material disposal’ of business assets as part of their withdrawal from a business may qualify for BADR on a subsequent, linked disposal of assets used in the business (the ‘associated disposal’).
The relief is available to partners or individuals with shares (or securities) in a personal company. Although sole traders cannot benefit under this condition, they may still qualify for BADR on the disposal of assets used in their business at the time they stopped trading, as set out above.
An associated disposal occurs when:
- A taxpayer makes a material disposal of a business or shares/securities in a company. Generally, this means there must be a significant reduction in the individual’s ownership of the business, although certain exemptions may apply:
- Partners must dispose of at least 5% of the partnership’s assets.
- Shareholders (or security holders) must dispose of at least 5% of the company’s share capital (or securities).
- The disposal is part of the individual’s withdrawal from the business. HMRC views this as a withdrawal from the ownership of the business, so the individual can continue working for the business as long as their ownership interest has significantly reduced.
- The asset disposed of was used in the business for at least two years and owned by the individual for at least three years before disposal.
Restrictions may apply if the asset was not used in the business for the full ownership period, or if rent was paid by the business for use of the asset.
Other considerations
Anti-forestalling rules
In relation to the increased rates of BADR announced at the Autumn Budget 2024, anti-forestalling rules apply so that, subject to a few exceptions:
- Where there has been a share reorganisation before 30 October 2024, and the shareholder continues to meet the conditions for claiming BADR on 30 October 2024 and makes an election on or after 6 April 2025 to disapply the CGT reorganisation rules (in order to claim BADR), the disposal will be treated as taking place on the date the election is made, and therefore the new applicable CGT rate will apply (the new CGT rates will also apply where an election is made following a reorganisation on or after 30 October 2024), and
- Where a contract for sale is made from 30 October 2024 to 5 April 2026 and completed from 6 April 2025, the new 14% rate of CGT will apply.
Claiming BADR
BADR must be claimed by the first anniversary of 31 January following the tax year of disposal, as shown in the examples below:
- If a disposal is made during the 2022-23 tax year a BADR claim must be made by 31 January 2025.
- If a disposal is made during the 2023-24 tax year a BADR claim must be made by 31 January 2026.
A claim for BADR is normally made by taxpayers as part of completing their self-assessment tax return.
Certainty on whether BADR conditions are met
Individuals cannot apply to HMRC for clearance to confirm that BADR will apply to a disposal.
Planning for spouses and civil partners
Each spouse or civil partner has their own £1 million lifetime gains limit under BADR. When both spouses or civil partners have an interest in a company or asset there may be planning opportunities to maximise the available BADR.
How we can help
Despite the upcoming increases in tax rates, Business Asset Disposal Relief remains a valuable tax break for individuals looking to grow and invest in their businesses. We can help you navigate the complex rules to ensure you meet the conditions and maximise this relief.
To find out more about Business Asset Disposal Relief, please get in touch with your usual Saffery partner, or talk to Adam Kay.
This article is based on law and HMRC practice at 11 December 2024, and incorporates the announcements from the Autumn Budget 2024, which haven’t yet been legislated.
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