What is Business Asset Disposal Relief (BADR) and Can I Use It? - Your Accounting Team

August 30, 2021by CBM Accounting0

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 utilised 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.

Directors and workers who are selling shares or securities in their firm (or group of companies) can use BADR.

Shares and securities in firms with considerable investment-related operations (such as most family investment companies) will not qualify for BADR since the relief is limited to trading companies and groups.

The following requirements must be satisfied during the two-year period ending with the date of disposal in order to be considered a material disposal:

  • The taxpayer must work for the firm or another company in the same group as an employee or director. Part-time employees might qualify for the relief because there is no minimum hours restriction.
  • The ‘personal company’ in which the shares (or securities) are held must be the taxpayer’s. This implies the taxpayer must own at least 5% of the company’s ordinary share capital (based on nominal value) and voting rights, and one of the following options:

– Have a beneficial interest in at least 5% of the company’s distributable earnings and 5% of the assets available to equity investors in the event of a winding up, or

– Be entitled to at least 5% of the profits from the sale of the whole ordinary share capital of the firm (in determining whether this test is met at any time during the requisite two-year period, the whole of the ordinary share capital is deemed to be sold at its market value on the last day of that two-year period).

  • The business must be a trade firm or a holding company for a trading firm. 

A trading firm is defined as one that is “carrying on trade operations whose activities do not involve, to a considerable amount, activities other than trading activities” according to the law.

– Any investment-related operations, such as property enterprises and investment portfolios, shall be considered activities other than trading.

– According to HMRC, a “significant extent” is defined as “greater than 20%.” In reality, the 20% test is applied to a variety of criteria, with the results varying depending on the facts and circumstances of each instance. However, parameters including as turnover, asset base, managerial time, and spending are usually taken into account.

Additional factors to consider

  • Individuals who own Enterprise Management Incentive (EMI) shares obtained through the execution of a legitimate EMI option are exempt from the aforementioned requirements. If the firm is not the taxpayer’s “personal company,” BADR is eligible for EMI shares if the option was given at least two years before the disposal (eg the taxpayer does not need to have either physically held the EMI shares for at least two years prior to disposal or meet the 5 percent personal company tests above). Exit-only EMI options, in which the option is exercised and the EMI shares are bought only before a sale, may qualify for BADR.
  • Following certain share offerings that dilute a taxpayer’s shareholding below 5%, they may no longer qualify for BADR. In these circumstances, the taxpayer may be able to make an election to preserve their right to BADR on the gain that has accrued up to that point in time, with the gain chargeable at the 10% BADR rate either at the time of the dilution or at a later disposal of the shares (or securities), assuming the other BADR qualifying conditions are met.
  • In some cases, BADR may be offered on shares (or securities) when the firm has ceased to trade in the three years preceding the disposal. Throughout the two-year period leading up to the date of trade termination, the shareholder must fulfil the different BADR qualifying requirements.
  • There are specific rules that consider a taxpayer’s exchange of shares in one company for shares or securities in another business as not being a disposal of shares for CGT purposes, deferring any capital gain otherwise accruing. If the additional shares or securities bought do not fulfil the BADR qualifying requirements, it may be advantageous for the individual to opt out of the ‘no disposal’ approach, allowing them to crystallise the gain and take advantage of BADR on the share market.
  • BADR, as previously stated, can be applied to shares and securities owned by trading businesses. Because the 5% ‘personal company’ criteria includes rights corresponding to ordinary share capital and voting rights, owning securities (such as loan stock) on their own would not typically qualify for BADR. However, if these assets are held alongside regular shares that fulfil the 5 percent threshold, the securities themselves may be eligible for BADR.

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.

Leave a Reply

Your email address will not be published. Required fields are marked *

CBM Accounting LtdHeadquarters
Serving all kind of businesses for over a decade.
Our locationsWhere to find us?
cbmaccounting
Get in touchCBM Accounting Ltd Social links
Taking seamless key performance indicators offline to maximise the long tail.
CBM Accounting LtdHeadquarters
Serving all kind of businesses for over a decade.
Our locationsWhere to find us?
cbmaccounting
Get in touchCBM Accounting Ltd Social links
Taking seamless key performance indicators offline to maximise the long tail.

Copyright by CBM Accounting LTD. All rights reserved.

Copyright by CBM Accounting. All rights reserved.

Managd By Digitizal