What is Business Asset Disposal Relief? Conditions and Examples

The Finance Act (FA) in 2020 brought about changes to the name and provisions of this relief. Business Asset Disposal Relief results in a tax rate of 10% on the value of the disposal. There’s no limit on the number of times you can claim and you are eligible to claim up to £1 million of relief during your lifetime. These rules are the same regardless of the income tax rate you pay.

In this blog, we will explain what Business Asset Disposal Relief (BADR) is, how it works, and how you will be subject to a tax rate of 10% on all gains made from eligible assets. 

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Who Can Claim BADR?

Business Asset Disposal Relief (BADR) is only available to individuals who are operating a business and disposing of a business asset. This disposal may be the sale of an entire business or the sale of shares. The types of businesses where BADR is applicable include the following: 

1. Sole trader
2. Partnership
3. Personal company
4. Joint ventures
5. Trust

BADR is only available to individuals who own a business or shares in a company. It doesn’t apply to companies as a whole, so a company can’t apply for BADR relief. Moreover, it only applies to qualified disposals of assets from the business. BADR cannot be used to dispose of investment assets, and can only be used by trading businesses. 

How To Claim BADR?

There are two ways to claim BADR. You can include it in your annual Self Assessment tax return in the ‘Capital Gains Summary’ section. If you go through this route, it is highly advisable to seek advice beforehand from a chartered accountant. You can also claim BADR by completing section A of the Business Asset Disposal Relief helpsheet. 

To be eligible for BADR, the disposal must fall into one of the following categories:

• A material disposal of business assets.
• A disposal that is associated with a material disposal.

 

Lifetime Allowance of Business Asset Disposal Relief

BADR claims are subject to a lifetime limit, currently set at £1 million. This new lifetime limit caused concern among owners who were in the process of selling their businesses or shares when the Finance Act reduced the limit from £10 million in March 2020.

However, it’s important to note that the lifetime limit of £1 million doesn’t affect how many times an individual can apply for and use BADR.

To ensure compliance with the lifetime limit, record any claims made and refer to this information to make sure you don’t exceed the threshold. If you do reach the £1 million limit, Capital Gains Tax will be applicable at the standard rate.

Deadline for Claiming Business Asset Disposal Relief

If you meet the conditions for BADR, you need to claim Business Asset Disposal Relief by the first anniversary of the 31st of January, following the tax year of the disposal of shares. For example, if you completed a business disposal on the 15th of June 2022, you have until the 31st of January 2024 to make a BADR claim.

Eligibility to Claim BADR

To be eligible to claim BADR, you’ll need to meet the following: 

1. The company or business must be a trading business. 
2. For sole traders or partnerships, a minimum trading period of two years must have been completed before selling or business ceasing. 
3. Ownership of at least 5% of the total shares is required, and these shares must have been held for a minimum of two years.
4. Shareholders must have been employees or officeholders (such as director) for a minimum of two years prior to the sale.

If you’re Selling All or Part of Your Business

To qualify for BADR, both of the following must apply for at least 2 years up to the date you sell your business:

1. You’re either a sole trader or a business partner.
2. You’ve owned the business for a minimum of 2 years.

It’s important to ensure that the 2-year minimum condition is met prior to selling the business. This timeframe is known as the ‘qualifying period” and, if someone is in the process of closing their business, these same conditions apply. However, BADR will only be available if the business asset is sold within 3 years of the business closure. 

If you’re Selling Shares or Securities

To be eligible for BADR, both of the following must apply for at least 2 years up to the date you sell your shares: 

• You are an employee or officeholder (such as a director) within that company.
• The company's main activities should be in trading, and shouldn’t be non-trading activities such as investments. It can also be a holding company overseeing a group of trading companies.

In both of these conditions, you must adhere to the minimum 2-year qualifying period before they sell their business.

If the Shares Are From an EMI

In case of shares being disposed of from an Enterprise Management Incentive (EMI), you must have both: 

1. The shares must have been bought on or after 5th April 2013.
2. You must have physically held the EMI shares for a minimum of 2 years before selling them.

Shares Are Not from an EMI

If the shares being disposed of aren’t from an Enterprise Management Incentive (EMI), the following criteria must be met: 

1. The business must qualify as your "personal company" for a minimum of 2 years before the shares are sold.
2. You must possess both 5% of the shares and 5% of the voting rights.
3. You should be entitled to a minimum of 5% of either the company's profits or disposal proceeds.

You can still be eligible for BADR even if you hold less than 5% of the shares, provided that the company has issued additional shares.

The Company Stops Operating as a Trading Company

If the company stops operating as a trading company, an individual can still be eligible for BADR if they sell their shares within 3 years of the company ceasing operations.

If you’re a Trustee

You may also be eligible for BADR when selling shares. However, these claims can be more complex, depending on the circumstances involving the trustees, trust and beneficiaries. Conditions are the following: 

• For a period of 3 years before the shares are sold, you must be classified as a qualifying beneficiary (QB) for either one year before 6th April 2019 or for two years after this date.
• The company of the shares being sold must be the "personal company" of the qualifying beneficiary.
• You must hold a position as an officer or employee within the company.

If you’re unsure of how to claim BADR as a trustee, contact us for tailored advice for your particular circumstances. 

If You’re Selling the Assets that Were Loaned to Your Business

To qualify, you need to meet the following conditions:

1. You must sell at least 5% of your share in a partnership or shares in a personal company.
2. The assets owned by you must have been used by the personal company or business partner for a minimum period of one year.
3. This year must coincide with the sale of the individual’s shares, the business, or the closure of the business. 

Alternatives to BADR

Given the £1 million lifetime limit of BADR, it’s worth considering alternative schemes depending on the size of the business asset being disposed of. These schemes include Investors' Relief, (Seed) Enterprise Investment Schemes and Employee Ownership Trusts.

How Pineapple Can Help

When it comes to taxes and selling your business, is important to consider all tax rules to make sure that BADR is not lost when selling your business assets. If you’re thinking of selling your business and want to make the most of BADR, reach out to our team of online certified chartered accountants, ready to support you at any time. 

We’ve got you covered when it comes to tax returns to ensure you claim the tax relief you’re entitled to. Learn more about our digital accounting services starting from £25 a month or check out our fixed monthly accounting plans and start maximising your tax savings.