A Summary of Business Asset Disposal Relief

Governments recognise that encouraging people to start businesses and employ others is beneficial to the economy and that any tax on disposal should be reduced to reflect the years of effort required to build a firm, as well as the financial risk that people face in doing so.

When Business Asset Disposal Relief (BADR), originally Entrepreneurs' Relief, was implemented in 2008 to replace the older Business Asset Taper Relief, this was the guiding idea. Its requirements have been stiffened in the intervening years, and the lifetime ceiling of capital gains eligible for the relief has been decreased from £10 million to £1 million, effective March 2020.

Shares of a trading company are sold.

The following are the prerequisites for claiming BADR for a sale of shares in a trading company: an individual (or, in some situations, trustees) disposes of:

• shares in a trading firm in which the seller was a company employee or executive, and

• which they controlled at least 5% of the ordinary share capital, and

• with the ability to exercise at least 5% of the voting power,

• each for a period of at least two years, terminating on the disposal date;

During the relevant two-year holding term, the seller must additionally pass one or both of the following two tests:

• have at least a 5% share of the company's distributable profits and a 5% share of the assets accessible to equity investors in the event of a winding-up, and/or

• In the case that the entire company's ordinary share capital is sold, the shareholders will get 5% of the proceeds.

If the 5 percent stake is diminished by a subsequent share issuance – presuming the offering was for business objectives – there may be some relief.

What happens if the firm no longer operates as a trading firm?

If a business ceases to exist, BADR may still be accessible if the shares are sold within three years of the business ceasing to trade.

If the disposal is not a third-party sale but rather the receipt of a capital distribution following the company's winding up, extra caution is required.

Other BADR-eligible dispositions

BADR can also be claimed (subject to the £1 million lifetime maximum) for any of the following disposals, as long as they are made by a person (or trustees in some cases):

Transfer of all or part of a business that the seller had owned as a lone trader or business partner for at least two years and ended on the disposal date;

A sale of assets used for the purposes of a business when the business has ceased to exist; and

A sale of personally owned assets (assets owned by the seller but used by the business), as well as a sale of at least 5% of the seller's ownership interest in the business, and other relevant conditions.

Are there any other options if I don't qualify for BADR?

If BADR is not available for a share sale, Investors' relief, a relatively new and unused relief that was introduced in 2016, maybe worth exploring. On lifetime gains of up to £10 million, this relief decreases the tax rate to 10%.

It is accessible when persons other than officials and employees, or trustees in certain circumstances, sell ordinary shares in unlisted trading businesses and is subject to a three-year holding period.

Accountants in London can help you manage and record your finances, as well as claim BADR! We have a team of experienced accountants on staff that will deal with HMRC on your behalf. Please get in touch with us straight away!