Maximising profits when selling your business and/or business assets
We are often asked by business owners how they might maximise profits when selling a business and/or business assets. One of the first things we would cover off is the relief known as Business Asset Disposal Relief (BADR).
Business Asset Disposal Relief replaced Entrepreneurs’ Relief back in 2020/2021 and it is, in the main, a widely under used tax relief.
Business owners and entrepreneurs, alongside the financial investment and financial risk taking, also invest a huge amount of time, expertise and passion into their business all in the hope that one day they will be able to dispose of the business, and its assets, in a way that it secures the financial future of themselves and their family.
Many business owners, and serial entrepreneurs, fail to recognise that when the whole business, or a significant part of it, is sold if you were to apply Business Asset Disposal Relief the rate of tax due on any gains can be reduced to just 10%!
This tax rate reduction does not happen by default and for BADR to apply you must meet several criteria and conditions and make a claim via your Self-Assessment tax return or by filling in Section A of the HMRC Business Asset Disposal Relief help sheet:
What are the qualifying criteria for BADR to apply?
• You must have owned the business for at least 2 years up to the date you sell it.
• You must be a sole trader or business partner.
• The company’s main activities must be trading.
The same conditions would apply if you closed your business, and you must also dispose of your business assets within 3 years to qualify for relief.
What if you are selling shares or securities?
• You have a 2-year period prior to the date you sell your shares in which to apply.
• You must be an employee or office holder of the company.
• The company’s main activities are in trading rather than non-trading like investment.
There are also other rules that may apply if the shares are from Enterprise Management Investment (EMI). If so, you must have both:
• Bought the shares after 5 April 2013
• Been given the option to buy them at least 2 years before selling them.
If the shares are not from EMI, then for at least 2 years before you sell your shares, the business must be a “personal company”. This means that you have at least 5% of the shares and voting rights.
There is no limit as to how many times you can claim Business Asset Disposal Relief. However, you can only claim a total of £1 million over your lifetime.
If you sold or close your business between 6 April 2023 and 5 April 2024, the deadline to claim BADR is 31 January 2026.
However, it is important that you are aware of the implications of the “anti-phoenix” rule!
What is the Anti-Phoenix rule?
There are “anti-phoenix” rules in place to avoid the exploitation of this generous relief.
If you claim BADR and then subsequently, within a two-year period, set up a new same business or similar company or business, the beneficial capital gain treatment of a capital distribution may be denied.
This anti-phoenixing rule was brought in to stop company dissolutions in order to simply avoid income tax. If HMRC believe that this is the case they will seek to tax what you believe is a capital distribution as an income dividend and it will be taxed at the higher income tax rate.
In this brief post we have merely highlighted some of the key points on BADR and disposing of business assets.
Business Asset Disposal Relief is a complex area of tax and it is important when selling a business that you seek professional advice from your accountant or tax advisor. If you would like to speak to a member of RPGCC’s team about tax, accounting or disposing of a business of business assets you can contact us on 020 7870 9050. You might also like to visit our Corporate Finance page and read more about how we help business owners sell their businesses.
