Business Asset Disposal Relief is always a hot topic for business owners thinking about selling their business and one of the biggest questions we are being asked at the moment is “Will Labour reduce the tax benefits Business Asset Disposal Relief provides to shareholders when selling a business?”
We asked across our Corporate Finance and Tax teams to get the answer to this question.
What is the tax benefit Business Asset Disposal Relief provides when selling a business?
Business Asset Disposal Relief (BADR), previously called Entrepreneurs’ Relief (ER), reduces the rate of Capital Gains Tax (CGT) on disposals of businesses or business assets from 20% to 10%.
There is a cumulative lifetime limit for qualifying gains of £1 million for disposals on or after 11 March 2020. This is reduced from the previous limit of £10 million for ER purposes. This means a current potential tax saving of up to £100,000.
What might the new Labour government change on Business Asset Disposal Relief?
Whilst Labour have said they will not raise income tax, there was no mention of CGT. There is a perception that CGT is not paid by “workers” so would not impact their traditional voters. It is entirely possible that the rates of CGT may change and BADR revised.
Business Asset Disposal Relief may or may not be retained, and the lifetime limit could be lowered again from the current £1 million per person.
The last time there was a change of Government the rate of CGT did change part way through a tax year. The change was effective from the date of the Budget in June 2010. If there was a change in CGT rate it is therefore likely to take a similar approach to either be effective from the date of the budget or from the following 6 April but with some anti-forestalling rules to stop people artificially creating gains at the lower rates.
What are the eligibility conditions for Business Asset Disposal Relief?
It is important to note that the main requirement is the sale of business assets but there are additional conditions that also need to be met:
• the sale of the whole or part of a business that had been owned throughout the 2 year period up to the date of disposal, or
• the disposal of business assets within 3 years after cessation of a business that had been owned throughout the 2 year period up to the date of disposal, or
• the disposal of an asset used by a partnership or company, where the disposal is associated with a disposal of partnership assets or company shares which itself qualifies for BADR, or
• the sale of a qualifying shareholding, which is 5% of the ordinary share capital and voting rights, or qualifying Enterprise Management Incentive shares, in a trading company or the holding company of a trading group. The individual must also be ‘beneficially entitled to’ either:
– 5% of profits (dividends), and assets available for distribution to equity holders on a winding up of the company, or
– 5% of the sale proceeds had the whole of the ordinary share capital of the company been sold on the day of the disposal.
• shares need to have been held for at least 24 months before BADR can be claimed
Trustees can claim relief on:
• A disposal of shares in a company where there is a qualifying beneficiary who also holds a qualifying interest in the company in their own right, or
• A disposal of assets used in a business carried on by a beneficiary which has ceased
Business Asset Disposal Relief, what is the claim process?
A claim for BADR must be made on or before the first anniversary of the 31 January following the tax year in which the disposal is made. The claim is normally included on the tax return for the year. If you are not registered to complete tax returns, the gain will create the need to register if it is above the current £3,000 annual exempt amount and the proceeds are more than £12,000.
Are you considering selling assets?
If you are considering selling assets and realising gains in the near term you should look at implementing disposals before the next Budget to ensure you benefit from the current regime. Furthermore, if you are considering selling your business and want to know more about Business Asset Disposal Relief or the ways that RPGCC can help you achieve a smooth sale of your business, please contact Matthew Burns.
If you would like to speak to a member of our team you can contact us on 020 7870 9050 or email us a hello@rpgcc.co.uk and a member of our team will contact you as soon as they are available.
