Business Asset Disposal Relief – don’t lose out!

Business Asset Disposal Relief (BADR) is a generous capital gains tax (CGT) relief available to individuals.

Where the relief applies, a reduced CGT rate of 10% is payable on qualifying disposals in place of the standard rate of 20% for higher rate taxpayers.  

Individuals claiming BADR are subject to a lifetime allowance which is currently set at £1m of qualifying capital gains. This means that BADR can potentially save a taxpayer up to £100,000 in tax.  

What disposals qualify? 

BADR applies to qualifying disposals of business assets. It can apply to disposals of a sole trade and its assets, partnership interests and assets, shares in a company, joint venture interests and business assets held by a trust.

Different rules apply for different disposals and in this article, we will focus on the rules applicable to the sale of shares in a company.

BADR on the sale of shares in a company 

In simple terms, to qualify for BADR on the sale of shares in a company, the following conditions must be met for at least two years prior to the disposal:

• The shareholder must be an employee or office holder of the company, or another company in the group.
• The company’s (or group’s) activities must be trading, other than insubstantial activities. If the company stops being a trading company, BADR can still apply if the shares are sold within 3 years.
• The shareholder must own at least 5% of both the ordinary shares and the voting rights.

The shareholder must also be entitled to at least 5% of either:

1. The profits available to equity holders, and the assets which would be available on the winding up of the company; or 
2. the disposal proceeds for ordinary share capital if the company is sold

It is also possible to qualify for BADR in certain circumstances where a shareholding falls below 5% because the company has issued more shares. 

Investors relief

If BADR is not available, for example because the qualifying conditions aren’t met, then it may be possible to claim investors relief instead.

Like BADR, investors relief offers a 10% CGT rate and has its own lifetime limit of £10m. The current maximum potential tax saving under investors relief therefore is £1m.

Investors relief can apply to disposals of ordinary shares in an unlisted trading company or the holding company of a trading group.

Unlike BADR, the shares must be subscribed for in cash (rather than purchased second hand) and in most cases, neither the investor, nor anyone connected with the investor, can be an officer or employee of the company throughout the period of ownership.

There is no minimum percentage shareholding requirement, but the shares must have been held for a minimum of 3 years.

Plan ahead

It is important for shareholders to review whether they qualify for these tax reliefs or risk missing out on valuable tax savings when they come to sell their shares.

This is particularly important before an initial share acquisition and whenever any changes are planned to a company’s share structure. 

The BADR qualifying conditions must be met for at least 2 years, and for investors relief some conditions have to be met throughout the entire share ownership period. Therefore, it is never too early for shareholders to consider this.

Further information

If you would like to discuss how these reliefs could work for you, please contact a member of our tax team.