BADR, formerly known as Entrepreneurs’ Relief, is a capital gains tax (CGT) relief designed to encourage people to expand and invest in their enterprises. It is a key source of relief for higher and extra rate taxpayers. Although its advantages have been decreased and it has been threatened with elimination in recent years, BADR has survived to date and continues to give tax savings to company owners.
On the sale of company assets, BADR is offered, lowering the CGT rate on qualified gains to 10%. (compared to the current standard rate of CGT of 20 percent ). Gains are limited to a lifetime ceiling of £1 million, therefore the present maximum possible tax savings under BADR is £100,000.
Individuals selling their personal enterprises or partnership interests, as well as directors and workers selling shares in the firm (or group of companies) for which they work, are eligible for the exemption. Trustees may be eligible for BADR under specific instances, although this isn’t covered in depth in this factsheet.
BADR is not accessible to corporate bodies, such as corporations, and because the relief is only available on the sale of business assets, BADR will not be available to taxpayers on the sale of investment assets.
Disposals that are BADR-eligible
The disposal must fall into one of the following categories to qualify for BADR:
- A substantial sale of a company’s assets.
- A waste disposal that is linked to a material disposal.
A substantial sale of a company’s assets
When evaluating a BADR claim, this is the group that most people fall under. There are three categories of ‘business assets’ that may be eligible for tax relief:
- A sole trader or partnership business in its entirety or in part.
- When a firm ceases to operate, an asset utilised in the business is sold.
- A company’s shares or securities (for example, lending stock).
Each of these groups has its own set of rules for what constitutes a “material disposal.”
A single trader or partnership firm in its entirety or in part
When a person who owns a business, whether as a single trader or as part of a partnership, sells their share of the firm, they may be eligible for BADR. Only assets used in the company at the time of the disposal will be eligible for relief.
To be a material disposal, you must:
The taxpayer must have held the business for at least two years before to the date of disposal, and the disposal must reflect either the whole business or, if only a portion of the business is disposed of, a business capable of being carried on in its own right. As a result, a single asset sale is unlikely to be eligible for BADR.
Property enterprises, with the exception of those that qualify as furnished holiday lettings businesses, are not eligible for BADR.
Assets utilized in a firm at the moment it is no longer in operation:
There is a time lag between the end of a business and the disposition of the assets utilised in the firm in some cases (especially for single traders).
BADR may be available on the sale of assets in this situation if the following material disposal requirements are met:
- The asset must be sold within three years of the business ceasing, and the business must have been held by the taxpayer for at least two years previous to ceasing.
It’s worth noting that the asset just has to have been in use by the firm at the time of cessation to qualify for relief, not necessarily throughout the whole two-year ownership term.
A company’s stock or securities.
BADR is available to directors and workers selling shares or securities in their firm or group of companies. However, it is not applicable to firms with significant investment-related operations, such as family investment companies. To qualify for BADR, the taxpayer must work for the firm or another company in the same group, own at least 5% of the company’s ordinary share capital and voting rights, and have a beneficial interest in at least 5% of the company’s distributable earnings and assets available to equity investors. The business must be a trade firm or a holding company for a trading firm, and any investment-related operations are considered activities other than trading.
Additional factors to consider:
Individuals who own Enterprise Management Incentive (EMI) shares obtained through a legitimate EMI option are exempt from certain requirements. BADR is eligible for EMI shares if the option was given at least two years before disposal. Exit-only EMI options may qualify for BADR. If a taxpayer’s shareholding is diluted below 5%, they may preserve their right to BADR on the accrued gain. BADR may be offered on shares or securities when the firm ceases trading in the three years preceding disposal. Exchanges of shares in one company for securities in another business are considered non-disposal for CGT purposes. BADR can be applied to shares and securities owned by trading businesses.
Disposals that are related
A taxpayer who has made a ‘material disposal’ of business assets as part of their exit from the company may be eligible for BADR on a subsequent, related disposal of business assets (the ‘associated disposal’).
Partners or people who own shares (or securities) in a personal corporation are eligible for the relief. Although sole traders are not eligible for this benefit, they may be eligible for BADR on the sale of assets utilised in their firm at the time they stopped to operate, as described above.
There will be a disposal linked with it, in which:
- A taxpayer disposes of a business or shares/securities in a corporation in a substantial way. Although there are few exceptions, this generally means that the individual’s ownership of the firm must be significantly reduced:
– Each partner must sell at least 5% of the partnership’s assets.
– Shareholders (or security holders) must sell at least 5% of the company’s capital stock (or securities).
- The sale is done as part of the individual’s exit from the company. HMRC considers this to be a sale of the firm, therefore the individual can continue to work for the company as long as their ownership stake has been considerably decreased.
- Prior to its disposal, the asset had been used in the firm for at least two years and had been held by the individual for at least three years.
If the asset was not used in the business for the whole ownership period, or if the firm paid rent for the asset’s usage, the relief available may be limited.
Other factors to consider
Making a BADR claim
BADR must be claimed by the 31st of January following the tax year in which the asset was sold. For example, if a disposal occurs during the tax year 2022-23, a BADR claim must be filed by January 31, 2025.
Taxpayers often submit a claim for BADR as part of their self-assessment tax return.
Assurance that BADR criteria have been satisfied
Individuals cannot apply to HMRC for approval certifying that BADR will apply to a disposal.
Couples and civil partners’ planning
Under BADR, each spouse has a £1 million lifetime gain cap. There may be planning possibilities to maximize the possible relief under BADR if spouses or civil partners both have a stake in a firm or asset where only one of them can qualify for BADR.
