Eligibility for Business Asset Disposal Relief
In simple terms, business disposals for tax purposes refer to the transfer of ownership of a qualifying asset to a buyer.
You could pay Capital Gains Tax (CGT) at 10% on the gains of assets that qualify for Business Asset Disposal Relief (BADR).
The qualifying conditions for the reduced rate of BADR Capital Gains relate to the sale or ‘disposal’ of:
- All (or part) of a business as a sole trader or a business partner (including assets of the business after it closed).
- Shares or securities in a ‘personal company’ if you have 5% (or more) shares and voting rights.
- Shares acquired through an Enterprise Management Incentive (EMI) scheme after the 5th of April 2013.
- Qualifying assets which you lent to the business or to your personal company.
Note: A trustee of settlements selling assets held in the trust may also qualify for HM Revenue and Customs Business Asset Disposal Relief.
Selling All or Part of the Business
The same eligibility criteria also applies when closing down a business instead. In this case, you would need to dispose of the business assets within three (3) years to qualify for Business Asset Disposal Relief.
Restrictions on Selling Shares or Securities
There are two main conditions to follow if you intend to sell your shares in the company. Both must apply for at least two (2) years before selling the shares:
- You must either have employee status or office holder status in the company (or one in the same group of companies).
- The primary activities of the company must be associated with trading (as opposed to non-trading activities – such as investments). It can also be the holding company of a trading group.
Note: The Capital Gains Tax guide explains more about how taxation on the profits realised after selling an asset works in Great Britain and Northern Ireland.
BADR on Shares from an EMI
The rules on Business Asset Disposal Relief change if the shares are from an Enterprise Management Incentive (EMI). In this case, you would need to (both):
- Have bought the shares after the 5th of April 2013.
- Had the option of buying the shares at least two (2) years before selling them.
Note: Another section contains more information about Tax and Employee Share Schemes, including Enterprise Management Incentives (EMIs).
The business would need to be a ‘personal company’ for a minimum of two (2) years before selling the shares if they are not from an EMI. Thus, you would have a minimum of 5% of the shares and voting rights.
Furthermore, you would also need to have entitlement to at least 5% of (either):
- Disposal proceeds – if the company gets sold.
- Profits available for distribution and assets on winding up the company.
In some cases, you can still claim Business Asset Disposal Relief if the number of shares you hold drops below the 5% minimum (e.g. if the company issues more shares).
You would either need to choose or be ‘elected’ as having sold and re-bought the shares immediately before the issuance of the new shares. Doing so would create a gain that would qualify for claiming Business Asset Disposal Relief.
What if you choose or ‘elect’ to postpone paying tax on that gain (e.g. until you sell the shares)? If so, you would need to (either):
- Complete the section of the Capital Gains summary form (marked additional information) on your tax return.
- Write to HM Revenue and Customs (HMRC) if there is no need for you to complete a tax return for that particular tax year.
Note: You may also qualify for BADR relief after selling the shares within three (3) years if the business ceases to operate as a trading company.
Selling Assets Lent to the Business
Both of these two condition must be met when selling assets that you lent to the business:
- You must have sold a minimum of 5% of your part of a business partnership or your shares in a personal company.
- You owned the assets, but let the business partnership or personal company use them for at least one (1) year up to the date you sold the business or shares (or the date that it closed).
How to Work Out the Tax Calculation
The method that you use to work out your tax will depend on whether all the gains are eligible for Business Asset Disposal Relief.
When All Gains Qualify for Business Asset Disposal Relief
- The first step is working out the gain for all business assets that meet the qualifying conditions.
- Next, add all the gains together (and deduct qualifying losses) to work out the total taxable gain that qualifies for Business Asset Disposal Relief.
- Deduct the current tax-free allowance for CGT.
- The amount that is left will be liable for 10% Capital Gains Tax.
Note: If you have other gains, the tax you pay on those will depend on what Income Tax rates you pay – and when you made the gain.
Higher Rate Income Tax Payers
Higher rate Income Tax payers will pay 28% tax on gains made before the 6th of April 2016 that are not eligible for Entrepreneurs’ Relief.
On the gains made from the 6th of April 2016 that do not qualify for Business Asset Disposal Relief, you should expect to pay:
- 28% on gains realised from residential property.
- 20% on gains made from other chargeable assets.
You can use the tax-free allowance against gains that would get charged at the highest rates (e.g. where the rate would be 28% tax).
Basic Rate Income Tax Payers
Basic rate taxpayers can use these steps to work out the tax rate that you can expect to pay on gains if they do not qualify for Business Asset Disposal Relief.
- Work out how much taxable income you have and then deduct your Personal Allowance and any other Income Tax reliefs you have entitlement to.
- Deduct this amount from the basic rate tax band for the year you made the gains (£37,500 in the previous full tax year). This gives you the amount of basic rate band you can use against the gains.
- Work out the total taxable gain.
- Use your basic rate band first against any gains eligible for Business Asset Disposal Relief (you pay 10% tax on these).
- Use any remaining basic rate band against any other gains. You pay 18% on gains made before the 6th of April 2016. For gains made after this you will pay 18% on gains made on residential property and 10% on gains from all other chargeable assets.
- On gains above the basic rate band you will pay 28% on those made before the 6th of April 2016. For gains made after this, you pay 28% on gains made on residential property and 20% on gains from all other chargeable assets.
- Use your tax-free allowance against the gains that would get charged at the highest rates (e.g. where you would pay 28% tax).
Important: You can either contact HM Revenue and Customs or seek professional help from a tax adviser (e.g. an accountant).
How to Claim Business Asset Disposal Relief
There is a set process for claiming Business Asset Disposal Relief on a tax return. Most people will claim Business Asset Disposal Relief on Self Assessment tax returns.
You can also use Section A on the ‘Business Asset Disposal Relief: HS275 Self Assessment helpsheet‘ (i.e. current version).
Business Asset Disposal Relief Claims Deadlines
|Tax Year of Selling or Closing a Business||Deadline to Claim Business Asset Disposal Relief|
|Between the 6th of April 2020 to the 5th of April 2021||31st of January 2023|
|Between the 6th of April 2019 to the 5th of April 2020||31st of January 2022|
|Between the 6th of April 2018 to the 5th of April 2019||31st of January 2021|
Note: There is no limit on how many times you can claim for Business Asset Disposal Relief. But, the maximum amount of relief you can claim during a lifetime is £1 million (unless the assets were bought before 11th of March 2020).
Related Help Guides
- Capital Gains Tax on personal possessions (chattels).
- How to liquidate a limited company yourself?
- Working out CGT on disposed assets for HMRC.
Note: This short video explains some of the benefits of using BADR to avoid paying Capital Gains Tax – not evade it!