Business Asset Disposal Relief (BADR)
Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, is a tax incentive designed to reward entrepreneurs and business owners for their hard work and investment by providing significant tax savings when selling or disposing of certain business assets (or when selling or closing your business). This relief can be a game-changer for your business’s financial future, so understanding how it works is crucial. This comprehensive guide will break down the critical aspects of business asset disposal relief, helping you navigate the tax landscape and maximise savings.
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What is Business Asset Disposal Relief?
Business Asset Disposal Relief is a tax relief available to individuals who own and dispose of specific business assets (or their business as a whole). These assets can include shares, securities, or tangible assets used in a qualifying trade. The relief reduces the capital gains tax you pay on these assets, making it a valuable incentive for business owners looking to sell or transition their business. N.B. For your company to get capital treatment on larger sums and to save significant tax, you should seek help from a licenced insolvency practitioner to go through an MVL (Members’ Voluntary Liquidation) process instead of distributing assets as dividends in a simple dissolution.
Qualifying for Business Asset Disposal Relief: Criteria
To qualify for BADR, there must be a qualifying business disposal. The business (a trade, profession, or vocation) must primarily engage in trading activities rather than investment activities, such as property rental or portfolio management. But trading activities include the commercial letting of furnished holiday accommodation for BADR purposes.
In most circumstances, there are several criteria you must meet for at least two years before the date of disposal to be eligible for BADR.
What Is a Qualifying Business Disposal?
Qualifying business disposals vary as per the following:
- A material disposal of business assets
- A sole trader or partner of a partnership disposing the whole or part of a business.
- A sole trader disposing of assets used in a business when it ceases.
- A disposal of shares by an officer or employee of their personal company (in most cases, means at least a 5% shareholding, with other conditions) – but can include other disposals of shares in certain circumstances.
- A disposal of trust business assets
- There are many conditions to consider, but an example could be:
- The trustees dispose of shares in a trading company,
- The beneficiary has an interest in possession,
- The company is the beneficiary’s personal company,
- And the beneficiary is an officer or employee of that company.
- There are many conditions to consider, but an example could be:
- A disposal associated with a relevant material disposal
- As with the disposal of trust business assets, there are many conditions to consider, but an example could be:
- A partner or officer owns an asset personally,
- And it is used in their partnership or personal company.
- As with the disposal of trust business assets, there are many conditions to consider, but an example could be:
The relief must be claimed on or before the first anniversary of 31 January following the tax year in which the disposal or cessation occurs.
How Much Can You Save with BADR?
One of the most appealing aspects of business asset disposal relief is the potential for significant tax savings. When you qualify for the relief, you pay a reduced CGT rate of 10%, as opposed to 20% or 28% for higher-rate taxpayers.
Lifetime Allowance for BADR
BADR also comes with a lifetime allowance. This means that you can claim relief over your lifetime on gains of up to £1 million. Any gains beyond this threshold would be subject to the standard capital gains tax rates.
Practical Application of Business Asset Disposal Relief
To better understand how business asset disposal relief works in practice, consider the following scenario. Suppose you are a business owner who meets the qualifying criteria and are selling shares in your company for a total gain of £800,000. With BADR, you could potentially save £80,000 in capital gains tax, as the tax rate is 10%. However, if you were not eligible for the relief, you would pay a significantly higher amount in tax.
Planning for Business Asset Disposal Relief
Planning is critical to making the most of business asset disposal relief. Here are some strategies to consider:
- Timing is everything: Consider the timing of your disposal. Ensure you meet all conditions for at least two years before the disposal or cessation of the business. Additionally, monitor your lifetime allowance to maximise savings over your lifetime.
- Structuring your business: How your business is structured can impact your eligibility for the relief. Seek professional advice to determine the most tax-efficient structure for your specific circumstances.
- Taking advantage of multiple reliefs: You may be eligible for other reliefs in addition to BADR, such as rollover relief or holdover relief. Combining these reliefs strategically can further reduce your tax liability.
Consult a Tax Professional
BADR is a valuable tax incentive for business owners, potentially saving you significant money when disposing of qualifying assets. To make the most of this relief, ensure you meet the ownership criteria, actively participate in your business, and plan your disposals strategically. Remember, tax laws and rates may change over time, so staying informed and seeking professional advice from a qualified tax professional or accountant is crucial. By effectively understanding and utilising business asset disposal relief, you can keep more of your hard-earned money and invest it back into your business or future endeavours.
Need Help with Business Asset Disposal Relief (BADR)?
Understanding the intricacies of BADR and implementing effective tax strategies can be complex. We can provide tailored advice to ensure you fully leverage this relief while remaining compliant with tax laws. Schedule an appointment through our online booking system, reach out via our online form, call us at 01743 562430, or email us at hello@mercianaccountants.co.uk today.