A Guide to Business Asset Disposal Relief (BADR) or Entrepreneurs’ Relief
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When anyone sells all or part of their business, he has to face Capital Gains Tax (CGT) on the profit that he makes. However, in the UK, the governments also offers a valuable tax break that is referred to as Entrepreneurs’ Relief, now officially called Business Asset Disposal Relief (BADR). This relief significantly reduces the rate of capital gains you pay when you dispose of qualifying business assets. Another factor is that it also helps business owners keep more of their hard-earned gains.
Having an expert, such as MMBA’s tax advisor, greatly reduces the burden and helps to understand all the aspects easily.
Table of Content:
What Is Entrepreneurs’ Relief (Business Asset Disposal Relief)?
Entrepreneurs’ Relief, or relief BADR, allows you to pay a reduced rate of capital gains tax (CGT) when they sell or dispose off qualifying business assets. Normally, the CGT rate for individuals goes up to 20%. But with BADR, you’ll only pay a flat rate of 10% on qualifying gains. Thus, it is up to a lifetime limit of £1 million.
This lifetime allowance applies to all qualifying business disposals that are made after 6 April 2020. Before this, the limit was £10 million. But it reduced to £1 million. Due to this reduction, it affects many business owners who are planning to exit their companies.
Who Can Claim Entrepreneurs’ Relief?
You can claim relief if you are selling:
- All or part of your business as a sole trader or business partner.
- Shares or securities in your personal company (or a trading company within a trading group).
- Certain business assets that you use in your qualifying business when the business ceased within the last three years.
However, specific eligibility criteria must be met for the relief BADR to apply.
Qualifying Conditions for Entrepreneurs’ Relief
To qualify for this tax relief, you must meet all qualifying conditions for at least two years up to the date of disposal. Here’s what that includes:
1. For a Sole Trader or Business Partner
- You should own the business for at least two years.
- The assets one intends to sell need to be qualifying business assets, For example, premises, machinery, or goodwill used in the trade.
- If your business ceased, you can still claim the relief if the disposal happens within three years of closing.
2. For Shares or Securities in a Company
If you sell shares or securities in a trading company, or the holding company of a trading group, the following must apply:
- The company must be a trading company (not mainly an investment company).
- You must be an employee, officer, or business partner of the company.
- You must own at least 5% of the ordinary share capital and voting rights.
- You must also be entitled to at least 5% of distributable profits and net assets on winding up.
These rules apply to make sure that the tax advantage targets genuine entrepreneurial investment, and are not passive ownership.
How the Capital Gains Tax Rate Applies
With Business Asset Disposal Relief, the rate of CGT is fixed at 10% on all qualifying capital gains. This reduced rate saves thousands as compared to the standard capital gains tax rate (which could be 20% for higher-rate taxpayers).
For example, if you sell your qualifying business and make a gain of £800,000, then you’ll only pay £80,000 in tax. This is a substantial saving under the BADR scheme.
If you exceed the lifetime limit, any further chargeable gains will be taxed at the normal rate of CGT.
How to Claim Entrepreneurs’ Relief
You can claim BADR through your Self Assessment tax return. But that tax return is of the tax year you made the disposal. You’ll need to fill in the section on capital gains. Moreover, one has to provide details of the business assets, the date of sale, and your share in the company (if applicable).
If you’ve already submitted your self assessment, you can still claim within 12 months of the 31 January deadline following the end of the tax year of disposal.
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Why Entrepreneurs’ Relief Matters
The aim of Entrepreneurs’ Relief (BADR) is to encourage entrepreneurship by giving rewards to those who build and grow successful businesses. If one applies a reduced rate of CGT, it helps business owners reinvest, retire comfortably, or fund new ventures.
This tax break makes sure that one earns these capital gains through genuine effort receive fair treatment compared to regular income. It’s a way for the UK government to support innovation and long-term investment and offers opportunities to reduce tax on cryptocurrency in the UK.
Important Considerations and Other Rules
- The lifetime limit reduced to £1 million. This means that to plan your business disposals becomes more important than ever.
- Deferred gains or disposals through trusts may have different rules.
- The Targeted Anti-Avoidance Rule (TAAR) prevents abuse. If you wind up a company just to avoid tax, and then restart a similar business, you might lose eligibility.
- Always check how the rules apply before selling assets or claiming relief.
Conclusion
Entrepreneurs’ Relief or Business Asset Disposal Relief is one of the most powerful tax advantages that is available to business owners. For instance, if a person is selling shares, closing the business, or has to transfer assets, he has to understand the qualifying conditions and CGT rate, this can save him a significant amount of tax paid. Moreover, having knowledge of corporation tax relief also gives one an edge over others.
With April 2025 approaching, tax rules may evolve, so it’s wise to consult a professional accountant or tax adviser before one makes a qualifying disposal. Proper planning makes sure that your qualifying gains fall under the 10% reduced rate. This also maximises your lifetime allowance and helps you get the best from your business success.
Frequently Asked Questions
What happens if I sell part of my business under Entrepreneurs’ Relief?
If you sell part of your business under e, you may still qualify for Business Asset Disposal Relief as long as the assets are qualifying assets and they meet the eligibility criteria which is set by HMRC.
Can business owners of a limited company claim Entrepreneurs’ Relief?
Yes, business owners of a limited company can claim the relief if they hold at least 5% of the share capital and voting rights. Another important aspect is that the company has to be a trading company or a close company.
What is the lifetime limit for claiming Business Asset Disposal Relief?
The lifetime limit for qualifying gains under BADR is £1 million. Any business disposals above this threshold will be taxed at the normal Capital Gains Tax rate.
Has the lifetime allowance for Entrepreneurs’ Relief changed?
Yes, the lifetime allowance was reduced from £10 million to £1 million when the lifetime limit reduced in April 2020. Also, this has an impact on many small business owners and entrepreneurs.
What are the eligibility criteria for claiming BADR?
To meet the eligibility criteria, you must own the qualifying assets for at least two years, and your limited company or close company must be actively trading at the time of business disposals.