Are you considering winding up your limited company – perhaps due to retirement or complying with the Off-Payroll (IR35) rules? Perhaps you'd like to sell all or a portion of your business to someone. Your business is a valuable asset. As a result, HMRC will certainly want a share of the proceeds. As a result, capital gains tax will be applicable. The good news is that you may qualify for tax relief on disposal of business assets and shares. And in this instance, you'll pay capital gains tax at a reduced rate and retain a greater portion of the profit.
Business asset disposal relief was previously known as Entrepreneur’s relief but Chancellor Rishi Sunak renamed it during his first budget speech in March 2020. 'Entrepreneurs' relief and business asset disposal relief are synonyms to each other, having the same eligibility criteria. The most important difference is that entrepreneurs' relief was capped at £10 million over a person's lifetime, whereas business asset disposal relief is capped at a far lower at £1 million.
- What is Business Asset Disposal Relief (BADR)?
- When BADR is applicable?
- Qualifying conditions for shareholders
- What HMRC means by trading company?
- How to claim the relief?
- Time limit for claiming the relief
- Case law – Mr and Mrs Potter v/s HMRC
What is Business Asset Disposal Relief?
BADR is a Capital Gains Tax (CGT) relief that lowers the tax rate payable on the disposal of business assets when the proceeds exceed the threshold and reaches higher tax brackets. Business Asset Disposal Relief reduces the amount of Capital Gains Tax (CGT) payable on the disposal of qualifying business assets on or after 6 April 2008, provided that you met the qualifying conditions for a two-year qualifying period ending on the date of disposal or the date the business ceased. Qualifying capital gains are subject to the following lifetime limits for dispositions on or after:
|Disposals on or after
|Lifetime limit per individual
|From 6 April 2008 to 5 April 2010
|From 6 April to 22 June 2010
|From 23 June 2010 to 5 April 2011
|From 6 April 2011 to 10 March 2020
|From 11 March 2020
When BADR is applicable?
It is applicable to the disposal of:
- A sole trader and its assets.
- Partnership assets and interest.
- Joint venture interests.
- Shares in your own company.
- Business assets held by a trust.
- Assets and partnership interests.
Qualifying conditions for shareholders
Qualifying conditions are the conditions which you need to meet in order to be eligible for “Business Asset Disposal Relief”. If you are a shareholder, the following conditions should be met:
Personal company– The Company should be your personal company, where you own at least 5% of the ordinary shares of the company, 5% of the voting rights and be entitled to 5% of the net asset on winding up.
Trading Company- The Company should be a trading company or preparing to trade, meaning investment activities or non-trading activities should not be substantial.
Employee/Officer- You should be an employee or officer (Director/Company Secretary) of the company.
The above conditions should have been met for 24 months leading up to the date of disposal.
In case of winding up, the distribution of assets and reserves should take place within 3 years of cease trading or else you will fail to qualify for the ER.
What HMRC means by trading company?
As per section 165-A3, a trading company is a company involved in trading activities and does not include substantial extent activities other than trading activities.
Many companies and groups perform such activities which are not considered as trading activities, but such companies & groups are still counted as trading in case their activities do not include “Substantial extent” activities other than trading activities.
Now, the question arises that how to measure company’s non-trading activities in order to assess whether they are substantial or not? There is no specific formula to measure the substantiality of non-trading activities but usually the test used is 20%, which is measured against the indicators given below:
Income from Non-trading activities– A company will not be considered as a trading company if the company receipts from investment activities are 20% or less of the total income. For example – If a company is involved in trading activities also renting out investment properties, if the total income from renting does not exceed 20% of the total revenue, then usually this condition will not be breached.
Company’s asset base- Company’s asset base is also one of the measures or indicators taken into account in order to review the company’s status. A company will not be considered as a trading company in case if company’s values of non-trading assets are more than 20% of the total assets. A trading activity is an activity in which company not only retains but also uses its previous assets for trading purpose. If company retains the previously used asset but does not use it longer for trading purpose, it may not be considered as a trading activity. Sometimes, in considering company’s assets, it may be considered appropriate to take intangible assets into account which are not shown on balance sheet. For ex – Goodwill. Current market value and amounts may be considered as appropriate measures of the relative extents of company’s trading & other activities. In between the two, which of the measure is appropriate depends upon the facts related to each case.
Time or expenses spent by the officers and employees of the company in undertaking its activities- Time or expenses spent by officers and employees of the company will also be considered as one of the measures in order to evaluate the company’s status. If the maximum proportions of the company’s expenses are incurred on non-trading activities, the company will not be considered as a trading company. A company will also be considered as a non-trading company, when a company devotes more than 20% of its time, cost or staff resources on non-trading activities.
HMRC would always look at the history of the company as seasonal variations may affect the substantial income requirements in a particular year. Moreover, balance of indicators is also considered useful in identifying if there is any substantial overall non trading activity going on or not. Sometimes one indicator points in one direction and other indicator points in the opposite direction. In such cases, you must weigh up the relevance of each case to identify what is more relevant in this context.
How to claim the relief?
You can easily claim Business Asset Disposal Relief on your self-assessment tax return in the section ‘capital gains summary’. In case you missed specifying Business Asset Disposal Relief in your tax return, you may claim it by writing a letter to HMRC or filling section A of the Business Asset Disposal Relief helpsheet. However, you may claim Business Asset Disposal Relief an unlimited number of times. You can claim up to £1 million in Business Asset Disposal Relief over the course of your lifetime. If you sold your assets prior to 11 March 2020, you may be eligible to claim a higher amount. It is recommended you seek professional advice before claiming the relief to avoid nasty surprises from HMRC.
Time limit for claiming the relief
There is a strict time limit for claiming the relief, or you could lose out on the generous tax benefit the scheme offers. The relief should be claimed within 1 year of 31st January, following the tax year in which the shares are disposed, or the assets are distributed. For example:
|31 January 2023
|31 January 2022
|31 January 2021
Case law – Mr and Mrs Potter v/s HMRC
If you take the recent case of Jacqueline Potter and Neil Potter against HMRC, HMRC denied the entrepreneur’s relief (Now changed to Business asset disposal relief) which both Mr. & Mrs. Porter wanted to claim. In November 2015, Mr. & Mrs. porter (Directors & shareholders of Gatebright Ltd.) liquidated their company and claimed Entrepreneur’s relief (Now changed to Business asset disposal relief) which was denied by HMRC on the following grounds –
- As per HMRC, the company ceased to trade when the last invoice was issued in 2009 and was only eligible to claim ER within the gap of three years period (before November 2012) as specified in Section B of the section 169I of TCGA 1992.
- HMRC also said that the activities carried out by the company “Gatebright Ltd.” had become investment activities due to the investment of reserves in the bonds.
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