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Business Asset Disposal Relief

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What is BADR?

Business Asset Disposal Relief (BADR) — formerly called Entrepreneur’s Relief (ER) until it was renamed in 2020 — reduces the rate of Capital Gains Tax (CGT) on certain disposal of business assets from 20% to 10%.

Who can claim BADR?

Generally, BADR is available to:

  • Sole traders and partners selling whole, or part, of their business

  • Some disposals of furnished holiday letting properties (subject to specific rules)

  • Directors or employees disposing of shares in a personal trading company, or the holding company of a trading group

  • Directors or employees disposing of shares they acquired through a qualifying EMI options scheme.

The time limit to claim BADR is one year from the 31 January following the end of the tax year of the disposal. For example, if the disposal took place between 6 April 2023 and 5 April 2024, the deadline for the claim will be 31 January 2026.

The situation can become a bit more complex when the asset is held in a trust. You may need specific, tailored professional advice to ensure BADR is available.

Disposing of a business

To qualify for BADR, partners or sole traders must have worked in the business for at least two years up to the date of disposal.

The disposal must be material — the whole or part of the business which you have owned for the two-year period leading up to disposal.  

Under limited circumstances, and if it satisfies the relevant tests, BADR is also available when disposing of single assets used in a business for at least two years following its cessation.

Disposing of shares

When it comes to disposing of shares in a company, it does not specifically need to be ‘your’ company. However, you do need to be part of it.

The following criteria must be met for the two years leading up to the disposal:

  • You must be an officer or an employee of the company, or one of the companies in the group.

  • The company’s main activities must be trading, or it must be the holding company of a trading group.

  • You must hold 5% or more of the share capital of the company and 5% of the voting share capital.

  • You must be entitled to at least 5% of either:

    • Profits that are available for distribution and assets on winding up the company; or

    • Disposal proceeds if the company is sold.

EMI shares also qualify for BADR, but the 5% holding requirement is not necessary, provided the option was granted two years before disposal.

If more shares are issued which dilute your holding to below 5%, you can choose to be treated as having sold and re-bought your shares immediately. This triggers a gain for CGT purposes, thus allowing you to claim BADR.

If you qualified for BADR when your company ceased trading, you can still claim provided it is disposed of within three years.

Missing out on BADR

If you are a business owner, you should think carefully before accepting preference and other classes of shares. These can reduce shareholders’ holdings to below 5% or strip you of your voting rights. As a result, you will fail to meet the specific tests for BADR.

Leading up to sale, some companies start holding heavy cash reserves, or investing in assets outside of the trade. It is important to be aware that this can dilute the company’s trading position and, as a result, the shares may not qualify for BADR.

Also, be aware that employees or directors claiming BADR should have had an active role in the company throughout the two years leading up to the disposal. They should not be there simply for BADR purposes.

Before contemplating a sale, it is worth taking professional advice around the structure of the business and the roles of individuals within it. This ensures you will be able to satisfy the relevant criteria for BADR.

What are the BADR limits?

The lifetime limit on claims for BADR is £1 million. As such, the maximum reduction in your tax liability is £100,000.

However, before 2020, the lifetime limit for ER was up to £10 million — and in the years before that, several different lifetime limits were set. Although the name may have changed, the lifetime limit includes any previous claims.

If you have previously claimed ER or BADR on business disposals, you will need to take these into account when assessing how much of the £1 million BADR lifetime limit you still have available.

Using Investors’ Relief instead?

Investors’ Relief (IR) can be a way for ‘Business Angels’ who have reached the BADR lifetime limit to reduce their CGT liability when they realise gains on their investments.

With IR, there are no minimum percentage holding requirements. This can make it more attractive to investors looking to provide funding to a business.

IR has a lifetime limit of £10 million, and, like BADR, it reduces the CGT rate from 20% to 10%. The requirements, however, are slightly different to BADR. All the following must apply:

  • the shares must be ordinary shares

  • the shares must be subscribed for in cash

  • the company must be a trading company, or a holding company of a trading group

  • none of the company’s shares can be listed on any stock exchange

  • the shares must have been invested on or after 17 March 2016

  • the shares must have been held for at least three years from 6 April 2016

  • neither the investor, nor anyone connected with them, can be an employee or officer of the company, or a connected company.

Should the investor later become an unpaid director, IR may still be available, provided the unpaid director doesn’t receive any value from company shareholdings.

As with BADR, IR may be available for assets held in trust, but this is likely to require specific professional advice.