Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, remains a key tax relief for business owners looking to sell. Although the relief has undergone significant reform since its introduction in 2008, it continues to offer a reduced rate of Capital Gains Tax (CGT) payable on qualifying disposals.
What is BADR?
BADR allows individuals to pay CGT at the standard rate of 18% on qualifying gains, compared to the higher rate of 24% that typically applies for most business disposals.
There is a lifetime limit for BADR which is now £1million of qualifying gains, this has been reduced from £10million. Despite this, BADR still remains a valuable relief where conditions are met and can provide a tax saving of up to £60,000.
What can I claim the relief on?
Broadly, qualifying ‘business assets’ can include:
- all or part of your sole trader or partnership business
- shares in your personal company
- certain disposals of assets associated with a qualifying business disposal
In all cases, you will need to have met the conditions for 2 years.
DISPOSAL OF SHARES
BADR may be available on the disposals of shares where:
- The disposal is of shares in a trading company (or the holding company of a trading group); and
- The individual is an employee or officer of the company; and
- The shares are in the transferor’s ‘personal company’ or are qualifying EMI shares; and
- Those conditions have been met for at least 2 years prior to disposal.
What is a personal company?
To be a personal company, the shareholder must hold at least 5% of the ordinary share capital
and voting rights in the company.
In addition, the individual must meet one of the following economic tests:
- Be entitled to at least 5% of distributable profits and net assets on a winding up; or
- Be beneficially entitled to at least 5% of the proceeds on a disposal of the entire share capital
Special rules apply to EMI (Enterprise Management Incentive) shares, where the 5% requirement does not apply, provided other conditions are met.
It should also be noted that changes were introduced in April 2019 to ensure that shareholders who found their interest diluted below 5% owing to the issue of more shares for cash will be able to crystallise their entitlement to BADR accrued to that point, subject to making an election.
DISPOSAL OF WHOLE OR PART OF THE BUSINESS
BADR is also available where:
- A business is disposed of as a going concern; and
- The business has been owned by the individual for 2 years prior to disposal.
DISPOSAL OF PROPERTY ASSOCIATED WITH DISPOSAL OF SHARES
Relief may also apply to disposals of personally owned assets used in a business, where they are disposed of in association with a qualifying disposal of shares. This may, for example, be the case where a commercial property is sold at the same time as shares in the company that uses it.
BADR has been subject to increasing scrutiny and legislative tightening over recent years. Given the complexity and continued evolution of the rules, a review is essential before relying on BADR.
What about trusts?
BADR can also apply to disposals involving trusts, although the rules are more complex.
- Trustees do not have their own BADR lifetime limit
- Instead, gains can qualify where there is a qualifying beneficiary (QB)
- The relief effectively uses the beneficiary’s remaining lifetime allowance
For trust disposals to qualify:
- The underlying conditions (e.g. trading status, personal company tests) must be met; and
- The qualifying beneficiary must have a sufficient interest in the trust assets
Recent case law has clarified aspects of these rules, particularly around the timing of beneficiary interests, but HMRC scrutiny in this area remains high.
Looking ahead
While the scope of BADR has reduced since its original introduction, it remains an important relief for business owners exiting their investments.
Successive governments have tightened the regime to limit perceived misuse and increase their tax revenue. As a result, the relief is now more targeted, with stricter qualifying conditions and a lower lifetime cap.
Further reform cannot be ruled out, particularly in the context of wider tax policy changes. Careful planning ahead of any disposal is therefore critical to ensure that relief is available and optimised.
If you would like tailored advice on whether your disposal qualifies for Business Asset Disposal Relief, please get in touch with a member of the Menzies tax team.