Entrepreneurs' Relief, now known as Business Asset Disposal Relief (BADR), is a UK tax relief that allows business owners to pay a reduced Capital Gains Tax (CGT) rate of 10% when selling all or part of their business or shares in a qualifying company. The relief applies up to a lifetime limit of £1 million in gains and is available to individuals who meet specific ownership and trading criteria, including owning the business or shares for at least two years. It incentivizes entrepreneurship by reducing the tax burden on business disposals.
Index
Understanding Entrepreneurs’ Relief (Now Known as Business Asset Disposal Relief)
Introduction to Entrepreneurs’ Relief and Business Asset Disposal Relief
Eligibility for Entrepreneurs' Relief
Selling a Business or Shares
Selling Business Assets
Changes and Lifetime Limits (Updated for 2024)
Calculating Capital Gains Tax under Business Asset Disposal Relief
Overview of Capital Gains Tax and BADR
Step-by-step Calculation of Capital Gains Tax
Real-world Examples of Capital Gains Tax Calculations
Lifetime Limits and Additional Considerations for BADR
How to Claim Business Asset Disposal Relief
Claiming BADR through Self-Assessment Tax Returns
Documentation and Information Required for a BADR Claim
Common Pitfalls in Claiming BADR
Examples of Claiming BADR for Business or Share Sales
Steps to Take If Your BADR Claim is Denied
Maximizing Business Asset Disposal Relief and Planning Your Exit Strategy
The Strategic Importance of BADR in Exit Planning
Timing the Sale of a Business to Maximize BADR
Spreading Out Business Sales to Maximize the Lifetime Limit
Avoiding the Pitfalls of Non-Qualifying Companies
Succession Planning and Business Transfers
How a Tax Accountant Can Help You with Business Asset Disposal Relief
The Role of a Tax Accountant in Securing BADR
Structuring the Sale for Maximum Tax Efficiency
Managing Complex Scenarios: Trusts, Shareholder Agreements, and Restructuring
Navigating HMRC Investigations and Disputes
The Benefits of Proactive Tax Planning
Understanding Entrepreneurs’ Relief (Now Known as Business Asset Disposal Relief)
Entrepreneurs’ Relief, now referred to as Business Asset Disposal Relief (BADR), is a significant tax relief available in the UK that allows business owners to pay a reduced rate of Capital Gains Tax (CGT) on the sale or disposal of qualifying business assets. This relief is highly beneficial for business owners, as it enables them to pay CGT at a rate of 10%, instead of the usual rates of 10% or 20% that typically apply to capital gains for higher-rate taxpayers. This reduced rate applies to gains on the sale of assets up to a lifetime limit of £1 million.
The relief has undergone several changes over the years, most notably the rebranding in April 2020, when it was renamed Business Asset Disposal Relief. Despite the name change, the fundamental concept and the tax-saving potential of this relief remain intact. The primary aim of BADR is to incentivize entrepreneurship by reducing the tax burden on individuals who have invested significant time and resources into building a business. Understanding the qualifications, eligibility criteria, and how to claim this relief is crucial for business owners planning their exit strategy.
1.1 What is Entrepreneurs’ Relief/Business Asset Disposal Relief?
Before diving into the specifics, let’s first break down what Entrepreneurs’ Relief (ER) was and how it transitioned into Business Asset Disposal Relief (BADR). Initially introduced in 2008, Entrepreneurs' Relief was designed to support entrepreneurs and business owners by reducing the CGT they would have to pay when selling their business or shares in a company. The relief was capped at a lifetime limit, which at one point was as high as £10 million, but has since been reduced to £1 million after April 2020.
Entrepreneurs' Relief allowed qualifying individuals to pay a lower rate of CGT on their gains from selling a business or shares, making it financially easier for owners to exit businesses or retire. In 2020, the government rebranded Entrepreneurs' Relief to Business Asset Disposal Relief and tightened the rules around the qualification process. However, the 10% CGT rate continues to apply for gains on disposals of business assets or shares, up to the set lifetime limit of £1 million.
1.2 Who Can Qualify for Entrepreneurs’ Relief/Business Asset Disposal Relief?
Qualification for BADR is quite specific, and it is crucial for individuals to meet these conditions to benefit from the reduced tax rate. To qualify for BADR, you must sell or "dispose of" all or part of your business, and you must meet certain ownership and operational conditions for at least two years leading up to the disposal. Let’s break down the main eligibility criteria:
1.2.1 If You’re Selling All or Part of Your Business
To qualify for BADR on the sale of a business, the following conditions must be met:
You must be a sole trader or business partner: This means that the business should be structured as a sole proprietorship, partnership, or another relevant form.
You must have owned the business for at least two years: Ownership means that you must have been directly involved in the business for at least two years up to the date of the disposal.
The business must be trading: The business you are selling must be engaged in trading activities rather than holding investments or managing non-trading activities.
Additionally, if you are closing down the business, you must dispose of your business assets within three years to be eligible for the relief. This flexibility in time allows business owners to plan the disposal of assets over a reasonable timeframe.
1.2.2 If You’re Selling Shares or Securities
Business Asset Disposal Relief also applies to the sale of shares or securities in a company, provided the following conditions are met for at least two years up to the date of sale:
You must be an employee or officeholder of the company: This includes directors, partners, or shareholders who actively work in or manage the company.
The company must be a trading company: The company must primarily engage in trading activities rather than investment-related activities. Holding companies of trading groups can also qualify.
1.2.3 EMI Scheme Shareholders
For shares acquired through an Enterprise Management Incentive (EMI) scheme, the rules are slightly different. To qualify for BADR:
You must have acquired the shares after 5 April 2013.
You must have been granted the option to buy the shares at least two years before selling them.
Shares acquired outside of an EMI scheme must meet additional conditions, including holding at least 5% of both the company’s shares and voting rights for a minimum of two years before selling.
1.2.4 Selling Business Assets
If you sell business assets, such as property or machinery that you lent to the business, the relief could still apply. However, you must:
Sell at least 5% of your part in the business partnership or shares in a company.
Ensure that the assets were used by the business for at least one year leading up to the sale.
This provision allows those who have invested personal assets in their business to benefit from the tax relief as part of the disposal.
1.2.5 Trusts
Business Asset Disposal Relief can also apply to trustees selling business assets held in trust, provided the trust meets specific qualifying conditions. However, this is a more complex area of tax law, and it is advisable to seek professional advice if you are a trustee disposing of business assets.
1.3 Examples of Entrepreneurs’ Relief in Action
To better illustrate how Business Asset Disposal Relief can be applied, let’s explore a couple of practical examples:
Example 1: Selling a Sole Trader Business
Imagine you are the owner of a small bakery that you have operated as a sole trader for over 15 years. After deciding to retire, you sell the bakery, which includes both the physical property and equipment used in the business. Since you have owned the business for well over two years and have been actively involved in trading, you would qualify for BADR. When selling the business for £500,000, you will pay CGT at the lower rate of 10% on your capital gains instead of the higher rates.
Example 2: Selling Shares in a Trading Company
Now, let’s say you own 10% of a small tech company’s shares and have been an active director of the company for the past five years. The company is primarily engaged in developing software (a trading activity) and does not engage in investment activities. You decide to sell your shares in 2024 for a total of £300,000. Since you have held more than 5% of the company’s shares and have been a director for more than two years, you can claim BADR, paying CGT at 10% on the gains from your share sale.
In both examples, the eligibility criteria of owning the business or shares for a minimum of two years, as well as the trading activity condition, have been met, making the individuals eligible for Business Asset Disposal Relief.
1.4 Changes and Lifetime Limits (Updated for 2024)
As of September 2024, the lifetime limit for claiming BADR remains capped at £1 million, a significant reduction from the £10 million threshold that was previously in place. This means that an individual can benefit from the 10% CGT rate on gains up to £1 million in their lifetime. Any gains exceeding this amount will be subject to the standard CGT rates of 10% or 20%, depending on the taxpayer’s income level.
This reduction in the lifetime limit has been a point of contention for many business owners, especially those who anticipated larger gains from the sale of their business. Nevertheless, the availability of the relief at all continues to be seen as a positive incentive for entrepreneurs looking to exit their businesses.
Calculating Capital Gains Tax under Business Asset Disposal Relief (Entrepreneurs' Relief)
Once you’ve determined your eligibility for Business Asset Disposal Relief (BADR), the next crucial step is to understand how to calculate the Capital Gains Tax (CGT) on the disposal of your business or shares. The relief effectively allows qualifying business owners to pay a 10% CGT rate on gains, instead of the standard rates of 10% or 20%. In this section, we’ll break down the steps for calculating the CGT under BADR, and provide practical examples to help clarify the process.
2.1 Understanding Capital Gains Tax and Business Asset Disposal Relief
Before diving into specific calculations, it’s important to have a clear understanding of how Capital Gains Tax (CGT) works. CGT is a tax on the profit you make when you sell or "dispose of" an asset that has increased in value. The tax is levied on the gain (the difference between what you paid for the asset and the amount you sell it for), not on the total amount you receive from the sale.
For business owners, CGT typically applies when you sell:
All or part of your business (this includes sole trader businesses and partnerships)
Shares or securities in a qualifying company
Business assets such as property or machinery used by the business
BADR reduces the CGT on these gains to a flat 10%, regardless of your income tax bracket. However, it’s essential to follow the right steps and ensure your calculations are accurate to take full advantage of this tax relief.
2.2 Steps for Calculating Capital Gains Tax under BADR
Let’s break down the calculation process into a few simple steps:
Step 1: Determine the Sale Price of the Business or Assets
The first step is to identify the sale price or disposal value of the business, shares, or assets you are selling. This is the amount you will receive from the buyer. For instance, if you are selling your business, the sale price could include the value of assets, equipment, intellectual property, or the goodwill associated with the business.
Step 2: Identify the Purchase Price or Acquisition Cost
Next, identify the original cost of the business or assets. This is the amount you initially paid for the business or shares. If you started the business from scratch, you will need to calculate the investment costs incurred over time, such as costs for equipment, premises, and stock. For shares, it would be the original price paid to acquire them.
Step 3: Subtract the Purchase Price from the Sale Price to Calculate Your Gain
Once you have both the sale price and the purchase price, subtract the purchase price from the sale price to determine your capital gain.
Capital Gain = Sale Price−Purchase Price
Step 4: Apply Any Allowable Deductions
In some cases, you may be eligible to deduct certain expenses associated with buying, selling, or improving the business or assets, such as legal fees, improvement costs, or marketing expenses. These deductions can reduce the overall taxable gain.
Step 5: Apply Business Asset Disposal Relief (BADR)
Once the capital gain is determined, if you are eligible for BADR, you will apply the 10% CGT rate to the gain. If the total gain is under the £1 million lifetime limit, all of the gain will be taxed at 10%.
2.3 Example 1: Selling a Sole Trader Business
Let’s take a look at an example to illustrate the calculation process:
Scenario: Jane is a sole trader who runs a small bakery. After operating the bakery for 15 years, she decides to sell the business and retire. She sells her business for £500,000. The original cost of setting up the business (including premises, equipment, and stock) was £200,000. Over the years, she has also incurred £20,000 in additional improvement costs.
Step 1: Sale Price of the business = £500,000Step 2: Purchase Price (original cost) = £200,000Step 3: Capital Gain before deductions = £500,000 - £200,000 = £300,000Step 4: Allowable deductions (improvement costs) = £20,000Step 5: Net Capital Gain = £300,000 - £20,000 = £280,000
Since Jane qualifies for BADR (she has owned and run the business for over two years), she applies the 10% CGT rate:
Capital Gains Tax under BADR:10% of £280,000 = £28,000
Without BADR, Jane would have paid CGT at the standard rate of 20% (for higher-rate taxpayers):
Standard CGT without BADR:20% of £280,000 = £56,000
By qualifying for BADR, Jane saves £28,000 in Capital Gains Tax.
2.4 Example 2: Selling Shares in a Personal Company
Scenario: John is a director and shareholder of a tech company that he helped to start five years ago. He owns 10% of the company’s shares, which he purchased for £50,000. The company is now being sold, and John’s share is valued at £400,000. John decides to sell his shares.
Step 1: Sale Price of the shares = £400,000Step 2: Purchase Price (cost of acquiring shares) = £50,000Step 3: Capital Gain = £400,000 - £50,000 = £350,000
John qualifies for BADR since he has held more than 5% of the company’s shares for over two years, and he is a director of the company.
Capital Gains Tax under BADR:10% of £350,000 = £35,000
Without BADR, John would have paid CGT at the higher rate of 20%, which would have resulted in a tax bill of:
Standard CGT without BADR:20% of £350,000 = £70,000
By qualifying for BADR, John saves £35,000 in Capital Gains Tax.
2.5 Additional Considerations for Business Asset Disposal Relief
Lifetime Limit on BADR
One of the key aspects of BADR is the lifetime limit on qualifying gains. As of September 2024, the lifetime limit remains at £1 million. This means that any gains above £1 million over your lifetime will not be eligible for the 10% CGT rate and will be taxed at the standard rates (10% or 20% depending on your income level).
Let’s consider another example where an individual exceeds the lifetime limit:
Scenario: Sarah has claimed BADR on several business disposals in the past, totaling £800,000. She is now selling her remaining business for £400,000.
In this case, Sarah will only be able to claim BADR on the first £200,000 of her gain from this sale, as she has already used £800,000 of her £1 million lifetime limit. The remaining £200,000 will be taxed at the standard CGT rates.
Capital Gains Tax on first £200,000 (under BADR):10% of £200,000 = £20,000
Capital Gains Tax on remaining £200,000 (standard rate):20% of £200,000 = £40,000
In total, Sarah will pay £60,000 in Capital Gains Tax on the £400,000 sale.
Postponing Taxation of Gains
Another important feature of BADR is the option to postpone paying CGT when a company issues more shares. This is particularly relevant when your shareholding falls below 5% due to the issuance of new shares. In such cases, you can "elect" to be treated as if you sold and repurchased your shares just before the new shares were issued, thereby locking in a gain on which you can claim BADR.
Selling Assets Lent to a Business
If you lent assets, such as equipment or property, to a business that you partially owned or operated, you could still claim BADR when selling those assets. To qualify, you must have sold at least 5% of your part in the business and owned the assets for at least one year leading up to the sale.
2.6 Special Rules for Trustees and Personal Companies
For trustees, BADR can be claimed on the sale of business assets held in a trust, provided the trust meets certain qualifying conditions. Similarly, for those selling shares in a personal company, the business must be a personal company, meaning the shareholder must hold at least 5% of shares and voting rights.
2.7 Changes to CGT Rates and Relief in 2024
As of September 2024, no further changes to the CGT rates or the BADR rules have been announced, but the lifetime limit remains an area of concern for many business owners, especially those planning larger disposals. It's advisable for individuals considering a sale to stay informed about any future changes in CGT policies that could affect their eligibility or the rates applied to their gains.
How to Claim Business Asset Disposal Relief (Entrepreneurs' Relief)
Having understood what Business Asset Disposal Relief (BADR) is and how it works, the next crucial step is knowing how to claim this relief. BADR can provide significant savings, but the process of claiming it must be handled correctly to avoid delays, penalties, or disqualification. In this section, we will explore the practical steps to follow when claiming BADR, common mistakes to avoid, and how HMRC deals with claims. Real-world examples will help illustrate each part of the process, ensuring that the complexities of claiming this relief become clearer.
3.1 When to Claim Business Asset Disposal Relief
The claim for BADR is made through your self-assessment tax return in the year you sell or dispose of the qualifying assets, shares, or business. The deadline to submit the claim is typically within 12 months after the 31st of January following the tax year in which the disposal occurred.
For example, if you sell your business in July 2024, you have until 31st January 2026 to claim BADR, as the disposal happened in the 2024-2025 tax year.
3.2 Claiming Business Asset Disposal Relief via Self-Assessment
The process of claiming BADR is integrated into your tax return submission, but it requires careful attention to detail. Here's a step-by-step guide on how to correctly submit the claim:
Step 1: Complete the Capital Gains Summary Section of Your Tax Return
The first step is to ensure that you accurately report the capital gains you’ve made on the sale or disposal of the business, shares, or assets. This is done through the Capital Gains Summary section of the self-assessment tax return.
You will need to include the following key details:
Description of the asset sold (e.g., business, shares, etc.)
Date of acquisition (when you bought the asset or started the business)
Date of disposal (when you sold the asset or business)
Disposal value (sale price or proceeds received)
Acquisition value (initial purchase cost, investment, or starting value)
Capital gain (the net gain after applying deductions, such as allowable expenses)
Step 2: Indicate That You Are Claiming Business Asset Disposal Relief
Within the Capital Gains section, there is an option to indicate that you are claiming BADR. This is a crucial step to ensure the relief is applied to your gains. You’ll need to confirm that you meet the qualifying criteria, including the length of time you’ve owned the business or shares, and that the business or company was engaged in trading activities.
Step 3: Provide Supporting Documentation
It is essential to retain any supporting documentation that proves your eligibility for BADR. While HMRC may not request this information upfront, they may ask for it during an inquiry. Supporting documents include:
Purchase contracts or agreements for the acquisition of the business or shares
Sale contracts showing the disposal price
Proof of ownership over the relevant period (e.g., shareholder records, partnership agreements, etc.)
Company accounts showing that the company was engaged in trading activities
Step 4: Submit the Claim by the Deadline
As mentioned earlier, you have until 12 months after the 31st of January following the tax year of disposal to make your claim. Missing this deadline could result in losing your eligibility for BADR, so it’s critical to stay on top of the tax calendar.
3.3 Example 1: Claiming BADR for the Sale of a Sole Trader Business
Scenario: Emily is a sole trader who has owned and operated a small graphic design business for 10 years. She sells the business in May 2024 for £300,000. Her original setup costs (equipment, office space, etc.) were £50,000, and she incurs £10,000 in legal fees for the sale.
Step 1: Emily calculates her capital gain as follows:
Sale price: £300,000
Acquisition cost: £50,000
Legal fees: £10,000
Capital gain: £300,000 - £50,000 - £10,000 = £240,000
Step 2: Emily completes the Capital Gains Summary section of her self-assessment tax return and indicates that she is claiming Business Asset Disposal Relief. She includes the details of the sale and gain, and confirms her eligibility (she has owned the business for over two years, and it is a trading business).
Step 3: Emily submits her claim before the deadline of 31st January 2026.
Because she qualifies for BADR, the capital gain of £240,000 will be taxed at 10%, resulting in a tax bill of £24,000.
3.4 Common Pitfalls When Claiming BADR
Although the process of claiming BADR might seem straightforward, there are several common mistakes that could result in a denied claim or unnecessary tax bills. Let’s explore some of the most frequent pitfalls and how to avoid them.
Pitfall 1: Failing to Meet the 2-Year Ownership Requirement
To claim BADR, you must have owned the business or shares for at least two years leading up to the sale or disposal. If you sell your business or shares before meeting this requirement, you will not qualify for the relief.
For example, if you set up a business in January 2023 and sell it in December 2024, you would not meet the two-year ownership threshold and would be ineligible for BADR.
Pitfall 2: Incorrectly Claiming Relief on Non-Qualifying Companies
Another common issue arises when individuals attempt to claim BADR for the sale of shares in non-trading companies. To qualify, the company must be engaged in trading activities, which means it must derive most of its income from providing goods or services rather than from passive investments.
For instance, if you own shares in a company that primarily earns income through rental properties or investments (a non-trading activity), you will not qualify for BADR, even if you’ve held the shares for more than two years.
Pitfall 3: Failing to Claim on Time
As noted earlier, missing the claim deadline could result in losing the relief entirely. HMRC is strict about the 12-month deadline for claims, so it’s essential to submit your self-assessment return on time. If you are uncertain about your eligibility or need more time to gather documents, consider filing a provisional claim within the deadline. This allows you to claim the relief but provides additional time to finalize the details.
3.5 Example 2: Provisional Claim for BADR
Scenario: George, a business owner, sells his technology company in January 2024. However, due to ongoing negotiations regarding deferred payments, he isn’t sure of the exact final sale price by the time he submits his tax return in January 2025. George wants to ensure he doesn’t miss the BADR deadline, so he submits a provisional claim for BADR on the portion of the gain he is certain of, and updates HMRC with the final details once the full sale price is confirmed.
In this case, George protects his right to claim BADR by making the provisional claim within the allowed time, ensuring he benefits from the tax relief when all the details are final.
3.6 What to Do If Your BADR Claim Is Denied
In some cases, HMRC may reject a claim for BADR, often due to errors in the claim process, failure to meet the eligibility criteria, or discrepancies in the information provided. If this happens, it’s important to take swift action.
Step 1: Review the Reason for Denial
HMRC will typically provide a reason for the denial of your claim. This could relate to the ownership period, the nature of the business, or missing documentation. Review the feedback carefully to understand the issue.
Step 2: Provide Additional Information
If your claim was denied due to missing or unclear information, you may be able to provide additional documents or clarification to support your claim. This might include company records, shareholder agreements, or contracts proving the business was trading.
Step 3: Appeal the Decision
If you believe the denial was made in error, you can appeal HMRC’s decision. You have the right to challenge the decision through HMRC’s internal review process or by taking the case to the First-Tier Tribunal (Tax).
3.7 Example 3: Appealing a BADR Denial
Scenario: Sophia sells shares in her family’s restaurant business, which she has owned for five years. However, HMRC denies her BADR claim on the grounds that the company’s trading status is unclear. Sophia provides additional documentation, including company tax returns and VAT records, proving that the restaurant was an active trading business during the qualifying period.
In this case, by supplying the necessary evidence, Sophia successfully appeals the decision and secures the tax relief she is entitled to.
3.8 Recent Updates to the BADR Claim Process in 2024
As of September 2024, there have been no significant changes to the process of claiming BADR, but HMRC continues to emphasize accurate and timely reporting. Taxpayers should ensure they are fully aware of their obligations under the BADR rules and remain vigilant for any future updates that could impact their claim eligibility.
3.9 Final Considerations for Claiming BADR
Claiming BADR can save you a substantial amount in Capital Gains Tax, but the process requires careful attention to detail. Ensuring that you meet the qualifying criteria, accurately reporting your capital gains, and submitting the claim on time are essential steps for successfully securing the relief. If you have any doubts or uncertainties, it is always advisable to seek professional advice from a tax accountant or specialist to avoid costly mistakes.
Maximizing Business Asset Disposal Relief and Planning Your Exit Strategy
Once you understand how Business Asset Disposal Relief (BADR) works and the process for claiming it, the next step is to explore strategies for maximizing the relief and planning a successful exit strategy from your business. This stage is crucial for ensuring that you take full advantage of the tax savings available under BADR, as well as for planning a financially efficient exit that aligns with your personal and business goals. In this section, we will examine strategies to maximize the benefits of BADR, the role of succession planning, and how you can effectively time the sale of your business or shares to reduce tax liabilities. As always, examples will illustrate these strategies in real-world situations.
4.1 Strategic Importance of Business Asset Disposal Relief in Exit Planning
Whether you’re a sole trader looking to retire, a business partner transitioning out of a venture, or a shareholder selling your stake, a well-planned exit strategy can help you maximize the benefits of BADR and minimize your tax burden. BADR plays a key role in enabling entrepreneurs to benefit from a reduced Capital Gains Tax (CGT) rate of 10%, and planning when and how you sell your business or shares can significantly affect the amount of tax you’ll ultimately pay.
Why is BADR Critical to Exit Strategy?
Without proper planning, entrepreneurs might face higher CGT rates (up to 20%) on the sale of their business, which could dramatically reduce the profits from the sale. BADR allows for a more tax-efficient exit by lowering the CGT rate. However, the £1 million lifetime limit means that business owners who plan to sell multiple businesses or large stakes must carefully strategize their disposals to ensure they maximize the relief over time.
4.2 Planning the Timing of Your Business Sale
One of the most effective strategies for maximizing BADR is to time the sale of your business or shares carefully. This requires attention to two key factors:
The two-year qualifying period: You must own the business or shares for at least two years before the sale to qualify for BADR.
The trading status of the company: The business must be engaged in trading activities for at least two years leading up to the sale.
By ensuring you meet these conditions, you can maximize the benefit of the 10% tax rate. Let’s look at an example to illustrate how timing impacts eligibility.
Example: Timing the Sale of Shares in a Trading Company
Scenario: Mark is a shareholder in a small retail company and owns 15% of the company’s shares. He became a shareholder in April 2023, and the company is engaged in retail trading activities. Mark is considering selling his shares in February 2025 when the company is being bought by a larger competitor.
Since Mark has only held the shares for 1 year and 10 months, he does not qualify for BADR if he sells the shares in February 2025. However, if he waits until May 2025 (after he has held the shares for 2 years), he would qualify for BADR and could pay the reduced 10% CGT rate on any gains.
In this case, timing the sale of shares to meet the two-year ownership requirement enables Mark to benefit from the relief and save a significant amount on his tax bill.
4.3 Avoiding the Pitfalls of Non-Qualifying Companies
It’s also important to ensure that your business or the company in which you hold shares continues to qualify as a trading business leading up to the sale. If the company shifts to non-trading activities (such as becoming an investment company), this could disqualify you from BADR. Careful succession planning and oversight of the business’s activities are essential for avoiding this pitfall.
Example: Protecting BADR in a Changing Company Structure
Scenario: Sarah owns 10% of the shares in a company that initially operates as a software development firm (a trading activity). However, in early 2024, the company’s directors decide to shift the business focus to managing rental properties, which is classified as a non-trading activity.
Sarah plans to sell her shares in late 2025, but because the company is no longer a trading business by the time she sells, she will not qualify for BADR. To avoid this issue, Sarah and the other shareholders could have planned the sale earlier, before the company changed its structure, ensuring that the company’s trading status remained intact at the time of disposal.
4.4 Spreading Out Business Sales to Maximize Lifetime Limit
Another critical factor to consider is the £1 million lifetime limit on BADR. If you are planning to sell multiple businesses or large stakes over time, it is essential to strategize how and when you make these disposals to maximize the relief available. Spreading out sales over different tax years, or coordinating the sale of various businesses at different stages of your career, can help you make the most of the lifetime limit.
Example: Spreading Out the Sale of Multiple Businesses
Scenario: John owns two businesses, a manufacturing company and a logistics company. The manufacturing business is worth £750,000, and the logistics business is worth £600,000. John is approaching retirement and is considering selling both businesses in 2024.
If John sells both businesses in the same tax year, the total gains would amount to £1.35 million, which exceeds the £1 million lifetime limit. He would be able to claim BADR on the first £1 million but would need to pay the higher CGT rate of 20% on the remaining £350,000.
Alternatively, if John spreads out the sales, selling the manufacturing company in 2024 and the logistics company in 2026, he can maximize the benefit of BADR. By doing this, he ensures that each sale is within the lifetime limit and that both sales qualify for the 10% CGT rate.
4.5 Succession Planning and Transferring Business Assets
Succession planning plays a key role in exit strategy, especially if you plan to pass the business on to family members or sell it to key employees. Proper planning allows you to transfer ownership in a way that still qualifies for BADR while minimizing the tax burden on both the current owner and the successors.
Example: Transferring a Business to Family Members
Scenario: Susan has operated a successful retail clothing business for 20 years and is now looking to pass it on to her children. Instead of selling the business outright, Susan gradually transfers shares in the company to her children over a period of years. As long as Susan retains at least 5% of the shares during the two-year qualifying period before she sells her final stake in the company, she can claim BADR on the gains.
This approach not only provides her children with a stake in the business but also allows Susan to claim BADR on the sale of her shares when she fully exits the business. Additionally, it spreads the tax burden over time, creating a smoother transition of ownership.
4.6 Involving a Tax Accountant to Maximize Relief
Given the complexity of BADR rules and the need for careful planning, involving a tax accountant is often essential to maximize the relief available. An accountant can help ensure that your business meets the eligibility criteria, assist with the timing of your disposals, and navigate any potential complications that arise from business restructuring or succession plans.
Example: How a Tax Accountant Can Help
Scenario: Richard owns a small technology firm and is planning to sell his shares in the company to a private equity group in 2025. While Richard has owned his shares for over 10 years and qualifies for BADR, he is unsure how to structure the sale in a way that minimizes his tax liability.
Richard hires a tax accountant, who advises him to:
Spread out the sale over two tax years, to keep the gains within the £1 million lifetime limit.
Ensure the company remains a trading company leading up to the sale by maintaining its core activities.
Retain some shares after the initial sale, which he can sell later to qualify for another round of BADR within the lifetime limit.
By following the tax accountant’s advice, Richard is able to minimize his tax liability and maximize the benefit of BADR.
4.7 Planning for Future Business Disposals
If you plan to sell other businesses or investments in the future, it’s important to plan ahead and consider how those sales will affect your lifetime BADR limit. Tax-efficient planning could involve spreading out sales over time, leveraging other available tax reliefs (such as Holdover Relief for gifts or Incorporation Relief for business transfers), or restructuring ownership in a way that maximizes the relief.
Example: Incorporation Relief for Business Transfers
Scenario: Lucy owns a successful sole trader business, and she is considering selling it in the next few years. Before selling, Lucy incorporates the business into a limited company, using Incorporation Relief to defer CGT on the initial transfer. When she later sells the shares in the company, she ensures that the disposal qualifies for BADR, allowing her to benefit from the 10% CGT rate.
In this example, Lucy’s tax accountant helps her navigate the incorporation process and plan for the eventual sale, ensuring that she maximizes the tax relief available under both Incorporation Relief and BADR.
How a Tax Accountant Can Help You with Business Asset Disposal Relief (Entrepreneurs’ Relief)
As we have explored in the previous sections, Business Asset Disposal Relief (BADR)—formerly known as Entrepreneurs’ Relief—offers significant tax advantages to business owners who meet the qualifying criteria. However, the rules can be complex, and even minor missteps in the process can result in missed opportunities to save on Capital Gains Tax (CGT). For this reason, involving a professional tax accountant in your planning and disposal process can be invaluable. In this final part, we will discuss in detail how a tax accountant can help you qualify for and maximize BADR, navigate HMRC rules, and plan an effective exit strategy that minimizes your tax liability. We will also consider real-world examples of how expert advice can make a tangible difference in securing BADR.
5.1 The Role of a Tax Accountant in Securing BADR
A qualified tax accountant has a deep understanding of the intricacies of UK tax law and BADR. Their expertise is critical for navigating the requirements of BADR and ensuring that you comply with HMRC’s rules. Here are some of the primary ways a tax accountant can assist you:
5.1.1 Ensuring Eligibility for BADR
The rules around eligibility for BADR can be nuanced, particularly when it comes to proving that your business or shares qualify for the relief. A tax accountant can:
Review your ownership structure to confirm that you meet the two-year ownership and trading requirements.
Ensure that the business you are selling is considered a trading company, not an investment company, at the time of the disposal.
Help you avoid common pitfalls, such as the company engaging in non-trading activities that could disqualify you from BADR.
By working with a tax accountant, you can be confident that you meet the necessary criteria for claiming the relief, avoiding surprises when it comes time to file your tax return.
Example: Ensuring Trading Status for BADR Eligibility
Scenario: James is the majority shareholder of a small IT services company. Over the years, the company has accumulated a substantial portfolio of investments in property and stocks. James is planning to sell his shares in the company and claim BADR, but he’s unsure whether the company’s trading status might be jeopardized by its investment activities.
James consults with a tax accountant, who reviews the company’s financial records and advises that the company’s trading activities must represent the majority of its revenue and operations in order to qualify for BADR. Based on this advice, James restructures the company’s investment portfolio and focuses on its core trading activities in the years leading up to the sale. When James eventually sells his shares, he is able to claim BADR and benefit from the lower CGT rate.
5.1.2 Structuring the Sale for Maximum Tax Efficiency
A tax accountant can help you structure the sale of your business or shares in a way that maximizes the tax benefits of BADR. This might involve:
Timing the sale to ensure that you meet the two-year ownership requirement or avoid exceeding the £1 million lifetime limit in a single disposal.
Spreading out disposals over multiple tax years to make full use of the lifetime limit on BADR.
Exploring additional reliefs, such as Holdover Relief or Incorporation Relief, to further reduce your tax liability.
This type of strategic planning can save you tens of thousands of pounds in tax and ensure that you retain more of the proceeds from your sale.
Example: Structuring the Sale of a Business
Scenario: Alison is a co-owner of a successful catering business. She plans to sell the business for £1.5 million, but is concerned about exceeding the £1 million lifetime limit on BADR. Alison’s tax accountant advises her to split the sale into two transactions: first, selling 60% of the business in 2024 for £900,000, and then selling the remaining 40% in 2026 for £600,000.
By structuring the sale over multiple years, Alison can claim BADR on the first £1 million of gains across both transactions, paying CGT at the 10% rate on the full £1 million, and only paying the standard CGT rate on the remaining £500,000. This strategy saves Alison a significant amount of tax and ensures that she maximizes her use of the relief.
5.1.3 Managing Complex Scenarios: Trusts, Shareholder Agreements, and Business Restructuring
BADR becomes more complex in scenarios involving trusts, multiple shareholders, or business restructuring. A tax accountant can help navigate these complexities and ensure that all parties involved benefit from the relief where possible.
For example, if your business is held in a trust or if you have a shareholder agreement in place, a tax accountant can help you ensure that all parties meet the qualifying conditions for BADR. They can also advise on the tax implications of restructuring your business before a sale, helping you avoid disqualification from the relief due to a change in ownership or company structure.
Example: Claiming BADR in a Trust Structure
Scenario: David and his family own a business that is held in a family trust. The trustees are planning to sell the business and distribute the proceeds to the beneficiaries. David is concerned that the trust structure might complicate the claim for BADR.
David’s tax accountant advises the trustees to ensure that the business qualifies as a trading company, and that the trust has owned the business for at least two years. The accountant also helps the trustees claim BADR on behalf of the beneficiaries, ensuring that they all benefit from the lower CGT rate on the sale.
5.2 Navigating HMRC Investigations and Disputes
If HMRC challenges your claim for BADR, a tax accountant can represent you in disputes and help you navigate the investigation process. HMRC may request additional documentation to support your claim, or they may challenge whether your business or shares meet the qualifying criteria. In these situations, a tax accountant can:
Prepare supporting documentation and respond to HMRC inquiries on your behalf.
Advise on the appeals process if your claim is initially denied.
Help you avoid common mistakes that could trigger an HMRC inquiry, such as failing to meet the trading activity requirements or misreporting your ownership stake.
Example: Resolving an HMRC Dispute
Scenario: Laura sells her shares in a family business in 2024 and claims BADR on the sale. However, HMRC later opens an inquiry into her claim, questioning whether the business qualified as a trading company at the time of the sale. Laura’s tax accountant reviews the company’s financial records and provides evidence to HMRC showing that the business was actively engaged in trading activities for the two years leading up to the sale.
Based on this evidence, HMRC concludes the inquiry and allows Laura’s claim for BADR, enabling her to pay CGT at the reduced 10% rate.
5.3 The Benefits of Proactive Tax Planning
One of the most valuable services a tax accountant can offer is proactive tax planning. By working with an accountant early in the process—before you decide to sell your business or shares—you can ensure that you meet all the qualifying conditions for BADR and optimize your tax position.
Proactive tax planning allows you to:
Identify potential issues with your eligibility for BADR and address them before the sale.
Time your disposal to maximize your use of the lifetime limit.
Explore additional tax reliefs that can further reduce your CGT liability.
By involving a tax accountant early in your exit planning process, you can avoid costly mistakes and ensure that you make the most of the available tax reliefs.
Example: Proactive Tax Planning for BADR
Scenario: Ben is considering selling his software development business in the next three years. Before making any decisions, Ben consults with a tax accountant, who reviews his business’s financials and advises him to retain ownership for another two years to meet the qualifying period for BADR. The accountant also identifies other potential tax reliefs, such as Rollover Relief for reinvesting the proceeds in another business, which could defer some of Ben’s CGT liability.
By planning ahead, Ben ensures that he qualifies for BADR and reduces his overall tax liability, allowing him to keep more of the profits from the sale of his business.
5.4 Key Takeaways and Conclusion
Business Asset Disposal Relief (BADR) offers a valuable opportunity for entrepreneurs and business owners to significantly reduce their Capital Gains Tax (CGT) liabilities when selling a business, shares, or qualifying assets. However, the process of qualifying for and claiming BADR can be complex, and even minor errors can result in missed tax savings.
A tax accountant plays a critical role in ensuring that you meet the necessary eligibility criteria, structuring your sale for maximum tax efficiency, and navigating any disputes with HMRC. By involving a professional early in your exit planning process, you can avoid common pitfalls, minimize your tax liabilities, and ensure that you fully benefit from the relief available under BADR.
Final Example: A Successful BADR Claim with Accountant Assistance
Scenario: Sarah, a long-time business owner, decides to sell her company in 2024. She works with a tax accountant who reviews her eligibility for BADR, helps her structure the sale to stay within the lifetime limit, and ensures that she qualifies for the 10% CGT rate. When HMRC requests additional documentation to support her claim, the accountant responds on her behalf and provides the necessary evidence.
With the help of her accountant, Sarah successfully claims BADR, saving her £80,000 in CGT and ensuring a smooth exit from her business.
In conclusion, Business Asset Disposal Relief can be a powerful tool for entrepreneurs and business owners looking to exit their ventures, but it requires careful planning and expert advice. By working with a tax accountant, you can navigate the complexities of BADR and ensure that you secure the tax savings you’re entitled to, leaving you in a stronger financial position after the sale of your business or assets.
FAQs
Q: Is Entrepreneurs’ Relief still available under the same name in 2024?
A: No, as of 2024, Entrepreneurs’ Relief is now called Business Asset Disposal Relief (BADR), though the benefits and qualifying criteria remain largely the same.
Q: Can you claim Business Asset Disposal Relief on multiple business sales?
A: Yes, you can claim BADR on multiple business sales, but the total lifetime gains eligible for the relief cannot exceed the £1 million limit.
Q: How long do you need to wait before selling a business after starting it to qualify for Business Asset Disposal Relief?
A: You must own and operate the business for at least two years before selling to qualify for BADR.
Q: Can you claim Business Asset Disposal Relief if you sell a business that is not actively trading?
A: No, the business must be actively trading for at least two years before the sale to qualify for BADR.
Q: Does Business Asset Disposal Relief apply to the sale of rental properties?
A: No, BADR does not apply to investment businesses like those primarily focused on managing rental properties, as these are considered non-trading activities.
Q: Can you claim Business Asset Disposal Relief on the sale of shares from a non-UK company?
A: No, BADR is only available on the sale of shares in UK-based companies that meet the qualifying criteria.
Q: Can Business Asset Disposal Relief be claimed on assets transferred to a family member?
A: Transfers to family members are not eligible for BADR unless the family member purchases the business or shares at market value, and all qualifying criteria are met.
Q: Is there a minimum percentage of a business you need to own to claim Business Asset Disposal Relief?
A: Yes, for shares, you must own at least 5% of the company’s shares and voting rights for two years before the sale to qualify.
Q: Can you claim Business Asset Disposal Relief if you gift your business to someone else?
A: No, gifting a business does not qualify for BADR; the business must be sold for you to claim the relief.
Q: Can Business Asset Disposal Relief be claimed after a business has been liquidated?
A: Yes, as long as the business was trading for at least two years prior to liquidation and the assets are sold within three years of closing.
Q: Can Business Asset Disposal Relief be claimed on a business sale if you continue to work in the company post-sale?
A: Yes, you can continue to work for the business after the sale and still claim BADR, provided the sale meets the qualifying criteria.
Q: Can you claim Business Asset Disposal Relief on shares obtained through inheritance?
A: No, inherited shares do not automatically qualify for BADR unless you meet the ownership and employment requirements for at least two years before the sale.
Q: Is it possible to lose Business Asset Disposal Relief if a business starts generating income from non-trading activities?
A: Yes, if a business shifts to non-trading activities, such as investments, you may lose eligibility for BADR unless the sale occurs within three years of the change.
Q: Are there any limits to the number of times you can claim Business Asset Disposal Relief?
A: You can claim BADR multiple times as long as your total lifetime gains across all claims do not exceed £1 million.
Q: Do you need to notify HMRC before selling your business to claim Business Asset Disposal Relief?
A: No, but you must declare the sale and claim BADR on your self-assessment tax return for the relevant tax year.
Q: Can you claim Business Asset Disposal Relief if you are a silent partner in a business?
A: Yes, you can claim BADR as a silent partner as long as you own at least 5% of the business and it meets the qualifying criteria.
Q: Can you claim Business Asset Disposal Relief if you are a minority shareholder in a company?
A: Yes, but you must own at least 5% of the company’s shares and voting rights for two years before selling.
Q: What happens if you sell part of a business—does it qualify for Business Asset Disposal Relief?
A: Yes, you can claim BADR on part of a business sale, provided the part being sold meets the qualifying conditions.
Q: Can you qualify for Business Asset Disposal Relief if you’re selling a business that operates in a different country?
A: No, the business must be based in the UK to qualify for BADR.
Q: Does Business Asset Disposal Relief apply to assets sold in the process of winding up a business?
A: Yes, provided the business was trading for at least two years before being wound up, and the assets are sold within three years.
Q: Can a trustee claim Business Asset Disposal Relief on behalf of beneficiaries?
A: Yes, trustees can claim BADR if the trust owns qualifying assets and the business meets the necessary conditions.
Q: Can you claim Business Asset Disposal Relief on shares acquired through an employee share scheme?
A: Yes, shares acquired through an Enterprise Management Incentive (EMI) scheme can qualify, provided you meet the ownership and employment requirements.
Q: Does Business Asset Disposal Relief apply to a partial buyout of your company shares?
A: Yes, as long as the sale meets the qualifying criteria, including the two-year ownership period.
Q: Can you claim Business Asset Disposal Relief on business assets that you no longer use?
A: No, the assets must have been actively used in the business for at least one year prior to the sale to qualify.
Q: Can you claim Business Asset Disposal Relief if your company is sold to a private equity firm?
A: Yes, if the sale meets the qualifying conditions, such as the ownership period and trading activity.
Q: Does Business Asset Disposal Relief apply to the sale of intellectual property?
A: Yes, if the intellectual property is part of a trading business that meets the qualifying criteria for BADR.
Q: Can you claim Business Asset Disposal Relief if you sell your business through a management buyout?
A: Yes, as long as the sale and your ownership of the business meet the necessary conditions.
Q: What happens if you claim Business Asset Disposal Relief but later realize the sale didn’t meet the criteria?
A: HMRC may deny the claim, and you would be required to pay CGT at the standard rate. You should review your eligibility carefully before claiming.
Q: Can Business Asset Disposal Relief be claimed on the sale of a business franchise?
A: Yes, as long as the franchise is a trading business and meets the qualifying conditions for BADR.
Q: Can you claim Business Asset Disposal Relief if you sell assets during insolvency?
A: No, assets sold as part of an insolvency process are not eligible for BADR, as the business must be actively trading.
Q: Can you claim Business Asset Disposal Relief on shares in a company that has gone into liquidation?
A: Yes, as long as the company was trading for at least two years prior to liquidation and the shares are sold within three years of liquidation.
Q: Does Business Asset Disposal Relief apply to the sale of assets that were not originally part of the business?
A: No, the assets must have been actively used in the business to qualify for BADR.
Q: Can you claim Business Asset Disposal Relief if you sell shares in a holding company?
A: Yes, if the holding company is part of a trading group that meets the qualifying criteria for BADR.
Q: Can you claim Business Asset Disposal Relief if you are selling a part-time business?
A: Yes, as long as the business is trading and you meet the ownership and operational requirements.
Q: Does Business Asset Disposal Relief apply to the sale of a business in administration?
A: No, businesses in administration are generally not eligible for BADR unless they were trading and sold before entering administration.
Q: Can you claim Business Asset Disposal Relief if the business is sold to a family member at a discounted rate?
A: No, the sale must be at market value for BADR to apply.
Q: Is it possible to defer Capital Gains Tax on a sale that qualifies for Business Asset Disposal Relief?
A: No, BADR does not allow for the deferral of CGT; it only reduces the rate at which CGT is charged.
Q: Can you claim Business Asset Disposal Relief if you sell a sole trader business but keep some assets?
A: Yes, as long as the assets sold meet the qualifying conditions for BADR.
Q: Can you qualify for Business Asset Disposal Relief if you sell a business in stages over several years?
A: Yes, each stage of the sale can qualify for BADR as long as the qualifying criteria are met for each transaction.
Q: Can Business Asset Disposal Relief apply to a business sale made to an employee through an Employee Ownership Trust?
A: No, sales to Employee Ownership Trusts do not qualify for BADR, but other tax reliefs may apply.
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