Business Asset Disposal Relief – maximising your claim
Formerly known as Entrepreneurs' Relief, BADR offers a 10% tax rate on the sale of your business. We look at the current rules.
Business Asset Disposal Relief (BADR) allows you to pay a reduced Capital Gains Tax rate of 10% on qualifying gains when you sell all or part of your business, up to a lifetime limit of £1 million.
To qualify, you must generally have owned the business (or at least 5% of the shares and voting rights in a personal trading company) for at least two years. The rules are complex, particularly regarding what constitutes a 'trading company', so it is essential to review your position well in advance of any planned sale to ensure you meet the criteria.
The definition of a trading company
To qualify for BADR on the sale of shares, the company must be a 'trading company' or the holding company of a trading group. This means its activities must not include 'to a substantial extent' activities other than trading. HMRC generally interprets 'substantial' as being more than 20%. If your company holds significant investments, cash reserves not required for the trade, or rental properties, this could jeopardise your BADR claim. Pre-sale restructuring may be necessary to separate trading and non-trading assets.
The 5% rule for shareholders
If you are selling shares in a company, you must be an officer or employee of the company, and you must hold at least 5% of the ordinary share capital and 5% of the voting rights. Furthermore, you must also be entitled to either 5% of the profits available for distribution and 5% of the assets on winding up, or 5% of the proceeds in the event of a disposal of the whole ordinary share capital. These conditions must be met throughout the two years leading up to the sale.
Selling assets vs. selling shares
BADR can apply whether you sell the shares in your company or the business sells its underlying trade and assets. However, the tax treatment is very different. If the company sells its assets, it pays Corporation Tax on any gains, and you then face a further Income Tax or Capital Gains Tax charge when you extract the proceeds from the company (e.g., via a solvent liquidation). Selling the shares directly is usually more tax-efficient, provided BADR is available.
Disclaimer
The information contained in this article is for general guidance on matters of interest only. It should not be used as a substitute for consultation with professional accounting, tax, legal, or other competent advisers. Before making any decision or taking any action, you should consult a Kingscott Dix professional.