In the UK, Business Asset Disposal Relief (previously referred to as Entrepreneurs’ Relief) experienced substantial changes in 2020 and, with a general election forecast, further changes could occur in the next 18 months.
Our personal tax experts consider the potential BADR changes that could be coming in 2024 or 2025 and explain why business owners with plans to sell may benefit from selling sooner rather than later.
What is Business Asset Disposal Relief?
Business Asset Disposal Relief (BADR) reduces the rate of Capital Gains Tax (CGT) to 10% on the disposal of qualifying business assets. It was known as ‘Entrepreneurs’ Relief’ until 2020.
The lifetime allowance for qualifying gains is £1 million for disposals on or after 11th March 2020 (reduced from the previous limit of £10 million for Entrepreneurs’ Relief).
While there is no limit to the number of claims an individual can make for BADR, the current maximum potential CGT saving is £100,000.
Who can claim BADR and what are the conditions to be eligible?
BADR can be claimed by business owners, including shareholders who are employees or office holders, sole traders and members of a partnership, provided they fulfil the conditions outlined below:
- Sole traders or business partners must have owned the business for a minimum of two years leading up to the sale. The disposal of business assets must occur within three years of the sale to qualify for relief.
- Individual shareholders must also have been an employee or office holder of the company (or within the same group) for at least two years before the sale. The company must primarily engage in trading activities.
- Enterprise Management Incentive (EMI) shares must be acquired after 5th April 2013, and the option to purchase them should be held for a minimum of two years before selling.
- Non-EMI shares must meet certain criteria, such as owning at least 5% of shares and voting rights. Individuals must be entitled to at least 5% of profits and assets in the event of winding up or sale.
- Individuals qualify for BADR if they have sold at least 5% of their part in a business partnership or their shares in a personal company. Additionally, they must have owned the assets used by the business for at least one year leading up to the sale.
- Trustees selling their interest in shares or assets used by a qualifying beneficiary’s business may also be eligible for BADR.
All individuals have their own £1 million lifetime allowance for gains under BADR, so there are potential planning opportunities available to spouses or civil partners who both have an interest in a company or business asset. However, a spouse or civil partner cannot claim BADR if the disposal occurred after the claimant’s death unless a verified representative claimed for the disposal before the death occurred.
Potential BADR changes
With a general election expected in the next year and predictions that there will be a new government, this could mean future changes to BADR.
Recent financial year data indicates that approximately 9,000 individuals paid around £5.1 billion in tax on £33.7 billion of capital gains. These figures imply an average tax rate of 14.8%, which is lower than the standard income tax rate of 20%. It is speculated that this inequality does not align with the taxation goals of the Labour Party and they may seek to curtail the advantages of BADR if they were to form a government.
Potential changes that could be made to BADR include:
- Stricter eligibility criteria – If the government tightens the eligibility criteria for BADR, it could exclude a larger number of business owners from claiming the relief. This could include excluding certain sectors or introducing tiered rates according to business size.
- Changes in qualifying assets – The definition of what counts as a ‘qualifying asset’ could become more restrictive.
- Higher Capital Gains Tax rates – The current 10% reduced CGT rate associated with BADR could be increased.
- Reduced lifetime allowance –While the lifetime allowance currently stands at £1million, this could be lowered to restrict the tax benefits on multiple business disposals.
BADR offers a tax-efficient method for business asset disposal but its future is dependent on political, economic and legal changes. With the potential of a general election looming, it is important to stay informed and seek professional advice before selling your business to find out if you can claim BADR.
What is Members’ Voluntary Liquidation and how does it work?
If you are looking to sell your business, Members’ Voluntary Liquidation (MVL) is one way to close your business and qualify for BADR.
MVL is a formal process for financially healthy companies to effectively stop operations when the business is no longer needed, whilst extracting any money tied up in the business in a tax-efficient manner as distributions are subject to CGT instead of Income Tax. MVLs are common for companies with over £25,000 to distribute among shareholders.
As MVL is a formal liquidation process, it must be conducted by a licensed insolvency practitioner serving as the company’s liquidator. Once appointed, the insolvency practitioner will handle all the required paperwork, such as a statement of affairs, gathering the company’s assets and distributing them among the shareholders.
After disposing of a company or your shares via MVL, you can apply for BADR by completing it on your Self-Assessment tax return.
MVL interaction with Targeted Anti Avoidance Rule (TAAR)
TAAR legislation was introduced in the Finance Act 2016 to counter ‘phoenixing’. Phoenixing involves shareholders putting a company into MVL to obtain the favourable CGT treatment on the funds extracted, before creating a new company operating in the same industry on a similar basis to the now wound-up company within two years of the first company being wound up.
If the TAAR applies to the transaction, the distribution from the MVL could be subject to Income Tax rather than CGT.
Take advantage of BADR now – how PKF Smith Cooper can help
We understand that BADR holds a vital position in fostering entrepreneurship and investment in the UK. While BADR offers a tax-efficient means to exit business ventures, the potential for tax reform means the future of this relief is uncertain and owners hoping to take advantage of the current CGT rate could benefit from acting sooner rather than later. Contact us to speak to our personal tax team for more information and specialist support.
If you are a company owner or director thinking of bringing your solvent business to a close and want to explore different options, like MVL, for the future of your company, contact us to leverage the expertise of our Business Recovery and Restructuring team.
