Is there any tax relief available for entrepreneurs and if so, how can you claim it?
For time crunched entrepreneurs balancing the everyday challenges of running a business with networking and employee obligations, it can be hard to find the time to focus on the small print. When it comes to disposing of business assets, it can be helpful to seek the advice of a tax lawyer early on, not only to reduce risk, but to protect any gains. Business asset disposal relief (BADR) – formerly known as ‘entrepreneur’s relief’ – can help save founders thousands of pounds in the long term.
If BADR can be claimed, it will reduce the rate of capital gains tax (CGT) to 10% (compared to the current standard rate of 20%) on qualifying gains up to a lifetime limit of £1 million. This is a CGT saving of £100,000.
What are ‘business assets’?
These include shares in and securities of a personal company and the transfer of the whole or part of a business.
What conditions do I need to be aware of?
As with most tax reliefs, there are various conditions that need to be met before a claim for the relief can be made. An outline of these conditions are as follows.
Disposal of shares and securities
BADR will apply to the disposal of shares or securities in a company by an individual, provided that throughout the period of two years ending with the date of the disposal, the following conditions are met;
- The company is a trading company or the holding company of a trading group.
- the company is a personal company of the individual making the disposal. This means that the relevant individual holds at least 5% of the company’s ordinary share capital which allows them to exercise at least 5% of the voting rights and is beneficially entitled to:
- 5% of the distributable profits and 5% of the company’s assets available for distribution on a winding up; or
- 5% of the disposal proceeds if the whole of the share capital of the company is sold.
- The relevant individual must be an employee or office holder of the company or a member of its group. There is no requirement as to a minimum number of hours worked.
Transfer of the whole or part of a business
BADR will apply to a disposal of the whole or part of a business by an individual provided that the business has been owned by the relevant individual (whether as a sole trader or in partnership) throughout the period of two years ending with the date of the disposal.
Disposals by partners or their interest in the assets of a partnership can also qualify for BADR where such are sold as part of the sale of the whole or part of a partnership business.
On the dilution of an individual’s shareholding below 5%, it might, with the making of an election, still be possible for the relevant shareholder to preserve their right to BADR on any gain that had accrued on their shares up to the point of dilution.
Where shares are exchanged for shares in another company as part of a share disposal, the no disposal tax rules mean that the exchange does not, for CGT purposes, amount to a disposal of the relevant shares sold and any CGT is deferred until the consideration shares acquired as part of the share exchange are sold. If BADR will not be available on the disposal of the consideration shares, the selling shareholder should consider whether to make an election to disapply the no disposal rules and preserve their right to claim BADR on the disposal of the original sale shares.
Gains made on the disposal of assets personally owned by shareholders or partners may qualify for BADR if certain conditions can be met.
Claiming the relief
Relief is not automatic and must be claimed (on a self-assessment tax return) on or before the first anniversary after the tax year of the relevant disposal.
If you need legal support with BADR queries or any of the other commonly faced issues associated with launching a business, please visit our webpage to find out how we can assist.