What is Business Asset Disposal Relief (BADR)?
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If you’re a small business looking for tax relief opportunities, Business Asset Disposal Relief (BADR) is a good area to investigate. The relief rates gained from it have changed in recent years and will continue to evolve in the future. But business owners could still reap many tax planning benefits from it.
This article goes over what Business Asset Disposal Relief is, who qualifies for it and what the rules are, and how to claim for it.
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What is Business Asset Disposal Relief (BADR)?
Business Asset Disposal Relief – previously called “Entrepreneurs’ Relief” – is a tax benefit that reduces the rate of Capital Gains Tax (CGT) when business assets, or an entire business, are disposed of.
A “disposal” doesn’t necessarily mean a sale. It can also mean giving the business away or trading it for something. You could be disposing of business or shares at the end of an ownership, or shutting a limited company down. This would still count as a disposal.
It can also mean an asset has been damaged or stolen, and you’re claiming compensation for the loss with a payout.
To understand BADR, you also need to understand CGT, as BADR claims directly impact the CGT rates you pay.
Read our blog on Capital Gains Tax.
Who qualifies for Business Asset Disposal Relief?
To qualify for Business Asset Disposal Relief, you must meet certain criteria, depending on your business type.
- Sole traders and business partners
For sole traders and business partners, the duration of your ownership and business structure both determine BADR eligibility. You must have owned the business for at least two years up to the data of the disposal. Whether you’re a sole trader or a business partnership, the benefit is applicable.
- Company directors and employees
Company directors and employees can qualify for BADR if they hold a minimum of 5% of a company’s share capital and voting rights. The timeframe still applies here, so the directors and employees in question must have been in this position for a minimum of two years.
The company must also be a trading company or the holding company of an active trading group – no company that is not trading can claim for BADR. The employee must be hired by or be an officeholder of your company or be in a company in the same group.
- Enterprise Management Incentive (EMI) Shareholders
Any employees or directors you have who are granted share options under the UK’s EMI scheme are eligible for BADR, provided they have held the EMI share options for two years before the disposal of shares, and those shares must have been acquired on or after 5 April 2013.
Benefits of Business Asset Disposal Relief
Claimers of Business Asset Disposal Relief can experience several benefits including:
Reduced tax rates
The Business Asset Disposal Relief has continued to offer a 10% Capital Gains Tax (CGT) rate on qualifying business disposals. The recent raising of CGT means there will be changes soon.
Specifically, disposal claims made on or after the beginning of the new tax year will either pay 14% on their CGT, and the following year, will pay 18%.
Here are the projected CGT rates for the next few tax years:
This information will be updated as it changes.
Tax Year CGT Rate 2024 10% 2025 14% 2026 18% 2027 TBA 2028 TBA Investment increase
The tax relief incentive makes owning and growing a business financially rewarding for business owners. Knowing they can pay a lower tax rate when the sell, they are encouraged to scale their companies, improving potential for growth and long-term value.
Multiple disposals
You can claim BADR on more than one business disposal if you remain in the lifetime limit – currently £1 million tax relief. Selling different business assets or shares at different times can generate revenue through the CGT tax relief gained from each asset or share, allowing you to take advantage of the reduced tax rate on multiple disposals.
Factors to watch out for
There are several potential pitfalls to bear in mind when you claim for BADR:
Eligibility
You must ensure you meet the strict requirements for BADR, confirm whether your business aligns with stipulations, and verify that your business qualifies as a trading company and not primarily an investment medium. Remember, only business that are actively trading can qualify for BADR.
Precise gains calculation
It’s vital that the gain on the sale is accurately calculated, and that allowable expenses are deducted. You must avoid overestimating or underestimating your gains, as this can lead to incorrect tax filings and potential penalties.
Staying within the limit
If you’ve previously claimed BADR, you must track their total gains to ensure you don’t exceed the £1 million lifetime limit. Any gains above the cap will not qualify for the tax relief percentage.
Proper timing
With changes to BADR upcoming – and more in the future – you need to take careful consideration of the claim’s timing to maximise the benefits. You also need to meet the two-year ownership period, so make sure you don’t make any premature claims.
Accurate record keeping
Maintaining clear and detailed records of ownership, shareholder percentages, and relevant transactions ensures the claim process is as simple and hassle-free as possible. Keep documentation on hand to support your claim, as well as calculations related to the gain. Cloud accounting platforms like Xero can streamline and automate this process.
How to claim BADR
Once you have verified eligibility, prepared the relevant supporting documentation, accurately calculated your gains, and ensured you’re not over the lifetime limit, it is time to submit the claim. There are a few ways to do this:
1. HMRC
You can submit your claim through HMRC’s Self Assessment tax return by doing the following:
- Find the Capital Gains section and select BADR
- Fill in the relevant details, using the tax relief percentage rate when applicable.
- For disposals during a specific tax year, include the BADR claim in that year’s Self-Assessment return.
Ensure you include all relevant forms and information. Once submitted, await acknowledgement from HMRC, responding swiftly to any requests for additional information or forms.
2. Expert accountant
Many businesses hire professional accountants to handle the claim on their behalf. These professionals often submit directly through the Self-Assessment portal while providing assessments and methods like Cloud Accounting to simplify the process, minimising errors and expediating the process.
3. Letter & email submissions
If Self-Assessment tax returns don’t apply due to your payroll services being handled by PAYE, you can claim BADR by writing directly to HMRC. In your email or letter, detail the nature of the disposals, your eligibility, and include all supporting documentation.
This method is slower than online filing but is suited to business owners who make occasional claims or are doing it on a one-off basis.
4. Third party platforms
Certain tax software platforms offer direct HMRC integration and can streamline the BADR claim, especially when managing complex gains or multiple disposals. Some of these platforms also provide guidance on the claim process within their software, allowing you to automate parts of the calculation and submission.
How expert accounting simplifies Business Asset Disposal Relief pursuits
Claiming BADR can significantly reduce your tax liability when selling your business, making the entrepreneurial journey more rewarding. Maintaining accurate records is essential for a successful claim and provides valuable insights into your business’s value, aiding in strategic planning and future growth.
If you’re thinking about claiming BADR, expert accounting services can navigate the hurdles seamlessly and make the claim process as fluid and hassle-free as possible.
Contact Mollan & Co today for a free, zero-obligation consultation.
Author ProfileI'm the owner and Managing Director of Mollan & Co Accountants. I'm a skilled and efficient accountant with more than 20 years of experience in the industry.
I developed valuable skills in commercialisation through my work in the science and technology department at the Scottish University. Then, in 2002, I formed my own internet-based marketing company, producing and distributing 360° virtual reality tours for the Scottish tourism sector.
I now use my commercial skills, expert tax knowledge and first-hand experience to help other businesses grow and flourish through strong accounting practice.
Our success at Mollan & Co is directly related to the success of our clients.
