17 Nov 2020
Entrepreneur’s Relief has provided a huge boost to UK business owners over the years by enabling them to pay less Capital Gains Tax (CGT) on the sale of their company or shares. In April 2020, the government replaced this tax break with the less snappily titled ‘Business Asset Disposal Relief’ (BADR).
BADR is also much less generous than its forerunner, but it still offers substantial CGT relief to business owners looking to dispose of assets.
BADR offers a tax break to individuals who dispose of all or part of their business, or shares in their personal company. It also covers trustees who dispose of business assets. The tax break aims to make the UK an attractive place to set up and run a business.
Critics of Entrepreneur’s Relief said it was too generous, so from April this year the government replaced it with BADR and cut the relief significantly.
Most importantly, it reduced the lifetime limit on CGT relief that business owners can get when disposing of a business to a tenth of the previous level.
Just like Entrepreneur’s Relief, BADR still offers to half your CGT rate to 10% when you dispose of qualifying business assets. However, for disposals on or after 11 March 2020, claims will be limited to the first £1 million of lifetime gains – compared to the £10 million limit under Entrepreneur’s Relief.
After the first £1 million, any remaining disposals will be subject to the main CGT rate, currently 20%. The maximum available relief has therefore fallen from £1 million to £100,000.
Any individual who has already claimed Entrepreneur’s Relief on gains of £1 million or more will no longer qualify for CGT relief on any future disposals.
To qualify for BADR, you must have owned the business and been a sole trader or business partner for at least two years before you sell it. You must also dispose of your business assets within three years to qualify for relief.
Also, both of the following must apply for at least two years before you sell your shares:
There are a variety of other rules, most of which aim to ensure that the claimant has a genuine, material stake in the business.
If your company stops trading, you can still qualify for relief if you:
If all your gains in the tax year qualify for BADR, work out the gains for all qualifying assets and add them together. Deduct qualifying losses, to work out the total taxable gain eligible for relief. Next, deduct your CGT allowance, which is £12,300 for individuals and £6,150 for trusts. You pay 10% tax on what is left.
If you have other gains, the amount you pay depends on your income tax rate - see more details here.
Where possible, you should claim BADR through your tax return. There is no limit to how many times you can claim, providing it is within the £1 million lifetime limit.
You may be able to claim more if you disposed of your assets before 11 March 2020. Check the deadlines for claiming or contact HMRC.
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