As a business owner, you should be conscious and aware of all of the ways in which you can save money and access relief. All of this information is available to you online and through various other resources, but it is up to you to educate yourself!
While it may seem admin heavy and time consuming to apply for certain relief funds etc, it is definitely well worth your time to know which options are available to you. Gaining knowledge about relief funds and ways to claim back is always advantageous and will help build your business knowledge.
What is BADR?
Did you know that, as a business owner in the UK, you may be eligible to pay less capital gains tax when you dispose of certain business assets? This is known as BADR (Business Asset Disposal Relief) and is a form of capital gains tax relief. This relief can be applied to capital gains of £1m throughout an individual’s lifetime. Shareholders, sole traders, and partners may all be eligible for this capital gains tax relief. BADR was known as Entrepreneurs Relief before April 2006.
Since then, it has been known as BADR and works in very much the same way as Entrepreneurs Relief. At one point, the lifetime cap on BADR was a whopping £10m but has since been reduced back down to £1m.
In this article, we tell you everything you need to know about Business Asset Disposal Relief, including the qualifying factors and what sort of assets it applies to.
What are the types of disposals that qualify for Business Asset Disposal Relief?
There are many different types of business assets and many different ways in which you could dispose of them. When it comes to the types of disposals that qualify for BADR, there are three main categories.
Disposal of the entire business or part of the business
If you want to sell or dispose of an entire business (sole trader or partnership), you may qualify for BADR. In these cases, the business will need to have been owned by you for a minimum of two years. You’ll also need to dispose of all your business assets within three years to qualify for relief.
Disposal or sale of shares
The disposal or sale of shares may qualify for BADR if:
- The company is your personal company, or you are an employee of the company.
- The business is the holding company of a trading group, or the business’s main activity must be trading. Investment companies are usually excluded from BADR. If the company stops being a trading company, you can still qualify so long as you sell your shares within three years.
- Owned the shares for a minimum of two years
If the shares are from an Enterprise Management Incentive, they may only apply if:
- The shares were bought some time after April 2013.
- Owned the shares for at least two years.
- You are entitled to a minimum of 5% of either the disposal proceeds should the business be sold or the available profits for assets and distribution. If you have gone below 5% because the company has sold more shares, you may still qualify for BADR, but you will have to complete the ‘Additional Information’ form when you do your Capital Gains summary for HMRC.
Disposal or sale of assets
If you are selling any assets you lent to your business, you may qualify for BADR if:
- Disposal of assets occurs within 3 years of closure of the business.
- You owned the asset yourself but lent this asset to your partnership or personal business for at least a year up to the date of the business or share sale. Or up until the date that the business closed down.
Assets can come in many shapes and forms, including equipment, property etc. If it is listed as an asset under business assets, you should not have a problem claiming BADR so long as it meets all of the other criteria.
It is very important that you keep detailed records of the purchase and sale of all of your assets so that you have proof in place when it comes to the qualifying periods. It will also make the claiming process a lot easier if you have detailed accounts.
What is a trading company?
As we have already mentioned, BADR is applicable only for trading companies. So what is a trading company exactly? A trading company is a company in which at least 80% of the business activities must be trading activities. And this is according to the HMRC. To figure this out, profits, the director’s time, and the nature of the business all need to be inspected. It is usually quite obvious whether a company is a trading company or not, but there can be grey areas in certain cases. Trading companies are typically companies in which products are sold to consumers or other businesses.
Is BADR still applicable if the company has stopped trading?
If you meet all other criteria for BADR, you can still receive this relief if the company has stopped trading. The two year period will end at the date that the company stopped trading. You will have three years from the date that the company stopped trading to dispose of assets and claim BADR.
How is BADR calculated?
All of the gains and losses on the assets that you wish to qualify for BADR must be aggregated. From this aggregation, a net gain is formed. This amount is taxed at 10% in the form of CGT. These gains are given a priority over other gains, with your other capital gains having a higher CGT rate. Your average allowance will always be used in the most beneficial way possible.
An individual can claim BADR multiple times throughout their lifetime, so long as the amount does not exceed £1m of capital gains. If you exceed this amount, you will be charged more, although there are other tax reductions and relief that could be applied to them depending on what type of assets they are.
If you are battling to calculate your gains, aggregate gains, and the amount you want to claim, you may want to look into employing a tax professional to assist you.
How to claim
Many individuals do not claim their BADR as they feel that it is a difficult and time-consuming process. But the HMRC has done their best to make this process as simple as possible for those who want to claim BADR. If you are an individual, you can claim for BADR in your usual tax return when you do it at the end of the tax year. If you have already missed this opportunity and want to claim it, you can write to the HMRC, or you can fill out Section A of the Claim for Business Asset Disposal Relief form.
If you are the trustee of a settlement, a claim will need to be made with the qualifying beneficiary. These joint claims can be done through writing to the HMRC or by filling out Section B of the Claim for Business Asset Disposal Relief form.
The HMRC is usually very helpful, and you can contact them should you encounter any problems along your claims journey.
To make the process as easy as possible, you should always keep detailed records and accurate accounts.
What are ‘associated disposals’?
In order for a disposal to be considered an associated disposal, the disposal needs to happen in association with your withdrawal from a company. It can also be carried on through a business partnership (you need to be a member) or through your own personal trading company (you need to be an employee or an officer).
To put it briefly, BADR is only applicable when you dispose of an asset that is directly associated with the minimising or reduction of your assets of a partnership or your personal company. The reduction of assets needs to be at least 5% for it to be viable and to be considered as an ‘associated disposal’.
What happens if you decide to withdraw all of your assets in a partnership, but it is still less than 5%? BADR may still be a possibility for you if you had more than 5% for 3 years or more.
‘Associated assets’ need to have been used by the business for 2 years, ending with the date of your withdrawal.
When is BADR not applicable?
Business Asset Disposal Relief qualifications can be confusing at times. To make things easier, BADR is not applicable in the following circumstances:
- If the business did not use the associated asset for the entire two year or three year qualification periods.
- When the associated asset was not used by the business in its entirety during the time that the asset belonged to you.
- When the asset or interest does not make up 5% or more of the business (although there are exceptions).
- If the business is not considered a trading business.
- You do not meet BADR claim deadlines.
- In certain cases in which you have been receiving rent for an asset lent to your business.
- If the business is not a sole trader or partnership business.
Trustees of settlements
If you are a trustee of a settlement and want to dispose of trust property, you may have Business Asset Disposal relief available to you. Assets that you may want to dispose of include securities shares, personal trading or other business assets.
The conditions include:
- The company in question needs to have been the beneficiary’s personal company. The company needs to have been the personal company of the beneficiary for at least two years.
- The company needs to have been a trading company.
- The qualifying beneficiary must have been interested in possessing the company.
- The company cannot have been owned by a trust.
BADR planning for spouses
If you and your spouse, or civil partner, both have assets or an interest in a company, you should make use of planning opportunities if you want to make the most out of BADR and other relief opportunities. You are able to maximise the relief that is granted to you and your spouse by splitting up shares, assets, etc. Keep in mind that each of you has a £1 million lifetime gains limit under BADR. A financial advisor will be able to give you expert advice on this particular topic, but it is important to take note of it.
Help! I still don’t understand BADR.
If you have made use of various online resources and are still battling to understand the concept of BADR and whether you qualify or not, you may want to speak to a professional accountant or financial advisor who will be able to clear things up for you as well as handle everything your BADR claims, as well as other claims too.
Hiring a tax professional may seem like an unnecessary expense especially if you currently handle all of your own tax and accounting, but hiring a professional could take a lot off your plate, prevent errors, ensure that you are completely compliant, and save your business money in the long run.
What about Investor’s Relief?
Investor’s Relief is considered the sister relief of BADR. Instead of a £1 million lifetime cap, Investor’s Relief has a £10 million lifetime cap. This relief is available to investors that have shares in a trading company that is unlisted. Just like BADR, there are many qualifying conditions. Investor’s Relief does not apply to officers or employees of the business.