Entrepreneurs’ Relief (ER) was renamed Business Asset Disposal Relief (BADR) by Finance Act 2020. Many business owners are familiar with business asset disposal relief (BADR), which offers individuals a capital gains tax rate of 10% on net chargeable gains, up to a lifetime limit of £1 million.
BADR is a Capital Gains Tax (CGT) relief that reduces the rate of tax paid on the disposal of business assets where the disposal proceeds are high enough to take you into the higher tax bands.
It can apply to disposals of:
– A sole trade and its assets.
– Partnership interests and assets.
– Shares in your own company.
– Joint venture interests.
– Business assets held by a trust.
When is BADR available?
– It is available to CGT disposals made by individuals and trustees. It does not apply to disposals by companies.
– It applies to qualifying disposals of business assets. It does not apply to the disposal of investment or non-business assets.
The effect of BADR
It reduces the rate of CGT payable on qualifying disposals to 10%.
How BADR works
Chargeable gains covered by BADR are taxed at a tax rate of 10%. The amount of BADR given depends on the amount of the individual’s BADR lifetime limit after taking previous disposals into account at the date of the disposal. The lifetime limit is £1 million from 11 March 2020.
Cessation of trade
The trading requirement will be available if the company has ceased trading provided the company:
– Satisfied the trading conditions for one year ending on the day the company ceased trading; and
– Ceased trading within three years ending on the date of disposal of its assets.
– You will need to appoint an insolvency specialist as solicitors are not authorized to wind up companies. There can be tricky issues arising around the question of when the trade ceased which we can help with.
Many businesses include a mix of trading and non-trading activities. Examples of non-trading activities can include:
– Property development;
– Investment activities;
– Licensing arrangements.
Qualifying trading activities
The legislation provides that companies and groups with mixed business and non-business trading income can be regarded as trading for the purposes of BADR if the overall business does not include to a “substantial extent” (as over 20%) non trading activities. The non-trading activities are assessed substantial if:
– Property companies can qualify as trading companies for Business Assets Disposal Relief (Entrepreneurs’ Relief) purposes providing other activities such as rental income are less than 20% of the overall trade;
– The asset base of the company. Goodwill can be taken into account in most cases;
– Time spent by staff on trading activities;
– History of the trade;
– Balance of indicators: HMRC considers matters in the round.
Holding company for a trading group
Business Assets Disposal Relief is available on the disposal of shares in a holding company of a trading group. The trading status of the holding company will be implied from the trading activities of the subsidiary or subsidiaries provided the holding company owns over 51% of the shares in each subsidiary.
If you want to help understand BADR, please get in touch and find out how we can help you.