What Is Business Asset Disposal Relief & How Does It Work?

Business Asset Disposal Relief (BADR) is a form of tax relief that reduces the amount of Capital Gains Tax (CGT) that individuals are required to pay on the disposal of qualifying business assets. Business Asset Disposal Relief was formerly known as ‘Entrepreneurs Relief’, until it was renamed in the March 2020 budget. The measure was introduced in 2008 as a government incentive to encourage entrepreneurs to start their own business, by reducing the financial risk and burden of doing so. There was concern that Business Asset Disposal Relief would be scrapped in the March 2021 budget, however the Chancellor announced that the tax break would remain in place. 

How Does It Work?

When a director/ shareholder sells or closes their company, they are required to pay capital gains tax on any gain made on their investment. Business Asset Disposal Relief helps to lighten this burden by applying capital gains tax at a discounted rate of 10% on gains of up to £1 million if you close down or sell your business. This is a lower cap (effective from March 2020), than Entrepreneurs Relief, that was capped at a higher limit of  £10 million. However, in spite of these restrictions, it is still a significant tax break that businesses can benefit from.  Without Business Asset Disposal Relief, you could expect to pay as much as 28% capital gains tax on funds distributed from the business upon sale or closure.

Who Qualifies For Business Asset Disposal Relief ?

In order to qualify for Business Asset Disposal Relief, you must be a sole trader, business partner or employee (and shareholder) of the company who is selling all or part of the business. There are different eligibility criteria depending on whether you are selling or closing the company, or selling shares in the company. 

If you are selling the company you must:

• Have been the sole trader or business partner for at least 2 years
• Have owned the business for at least 2 years

This is where Business Asset Disposal Relief is beneficial for companies who choose to close down their company via a Members’ Voluntary Liquidation (MVL), by allowing them to do so in a tax efficient way. 

Shareholders can also apply for Business Asset Disposal Relief via a voluntary company strike-off, so long as their reserves do not exceed £25,000. Should they exceed this limit, they will need to close the company via an MVL to avoid funds being distributed as income for tax purposes. 

If you are selling shares in the company you must:

• Have have held 5% or more of the share capital of the company and 5% of voting share capital for at least 12 months prior to making a claim
• Have owned the shares for at least 2 years
• Have been an employee or office holder of the company for at least two years (when selling shares you are not required to have owned the business)
• Be a trading company, meaning that “non-trading” activities such as investments, don’t make up more than 20% of your income 

If you think you might qualify for Business Asset Disposal Relief and are interested in closing your company via an MVL, please don’t hesitate to get in touch with our experienced insolvency team today.