How Does Business Asset Disposal Relief Operate in England?

As a business owner, you may want to minimise your liability for capital gains tax once you have sold a capital asset at a gain. In this instance, you may qualify for business asset disposal relief, sometimes called entrepreneur’s relief. This article will explain the rules to qualify for business asset disposal relief and how you might benefit. 

Business Asset Disposal Relief 

Business asset disposal relief (BADR) is a kind of tax relief. If you qualify for any form of tax relief, this means you can reduce the total amount of money you owe HM Revenue & Customs (HMRC). 

The effect of BADR is that HMRC charges you at the lower capital gains rate for the qualifying taxable chargeable gain. Currently, the lower rate is 10%. This is significantly lower than the taxable chargeable gain which currently sits at 20%. HMRC will likely charge this rate if you do not qualify for BADR. 

Before we consider what conditions you must meet to qualify for BADR, we will look at some of the fundamental rules governing tax law for the sale of capital assets. 

What is a Capital Asset?

BADR is only available for qualifying capital assets. Capital assets are property that you use to generate income but are not an income asset itself. For instance, plants and machinery are capital assets. If you sell manufactured goods, you need the machinery to produce the goods you sell. 

On the other hand, you will not benefit from BADR for any income you receive. Income is generally any recurring payment you receive, such as:

• wages an employer pays you; 
• dividends you receive from company shares; and 
• rent a tenant pays you.

Another way to look at how the law defines a capital asset is if it is something you do not routinely buy or sell. Ultimately, not all capital assets qualify for BADR. 

What is a Taxable Chargeable Gain? 

The taxable chargeable gain is the taxable difference between the price you paid for a capital asset and the price you sold it for. For instance, if you buy a warehouse to lease to a commercial tenant (i.e. a capital asset) for £100,000 and later sell it for £200,000, the difference is £100,000. 

However, in practice, the taxable gain is usually less than the difference between what you paid for the capital asset and how much you sold it for. This is because HMRC grants you additional deductions. These include:

• incidental initial expenditure, which are all the associated costs and fees you incurred when you purchased the property like legal and brokerage fees;
• subsequent expenditure, which is any money you spent improving the value of the property; and 
• disposal expenditure like legal and brokerage fees incurred selling the property. 

In other words, you subtract all these expenses from the amount you sold the capital asset for to arrive at the taxable chargeable gain. If you qualify for BADR, the relief will be applied to this amount. 

Qualifying for BADR

BADR only applies to four kinds of transactions involving capital assets. These kinds of transactions are the sale of:

• all or part of a trading business; 
• a business that used to trade; 
• shares in a trading company; and 
• shares in a company that used to trade.

1. Sale of All or Part of a Trading Business

In this transaction, you must have personally sold the assets of a trading business. If you trade through a company and the company owns the assets, this kind of transaction will not apply. 

Say you and a partner have a consulting business run as a partnership. You sell off your database to a competitor for £100,000. As the database is a capital asset and a part of a trading business, this transaction would qualify for BADR provided two conditions are met. These conditions are: 

• the business is a trading business; and 
• you owned the business for at least two years before the transaction. 

Investment businesses are not considered trading businesses. Likewise, the transaction would not qualify for BADR if you bought the partnership less than two years ago. 

2. Sale of Assets in a Business That Used to Trade

As in the above example, if your recruitment business no longer trades but you still manage to find a buyer for your recruitment database, this transaction may qualify for BADR if three conditions are met. These conditions are:

• you owned the business for at least two years before it ceased to trade;
• the assets you are selling (the database) were used in the business when it ceased to trade; and
• you sell the assets within three years since the business stopped trading.

3. Sale of Shares in a Trade Company

Many businesses are structured as companies. Where this is the case, the company owns the business assets, not the shareholders. Therefore, if instead of running your recruitment business as a partnership (or sole trader) but a company, and you sell your shares in the company, the money you obtain for the shares may qualify for BADR. 

For this to happen, you must ensure:

• your company must have been a trading company for at least two years before the date you sell shares in it;
• you owned the shares yourself for at least two years before the transaction; and
• you must have held at least 5% of the shares in the company and were a director (or secretary) in the company.

4. Sale of Shares in a Company that Used to Trade

If your company ceased trading not more than three years ago, BADR may apply if you sell your shares. However, you must have:

• held the shares for at least two years; 
• been a director or secretary of the company and owned 5% or more of the shares in it; and 
• sold the shares within three years from the date the company stopped trading. 

As above, you must be a director or otherwise an employee of the company to qualify. 

Lifetime Allowances

All individuals can claim up to £1m in BADR. This means that if the sum of the chargeable gains eligible for BADR does not exceed £1m in total throughout your life, you will only pay 10% on the gains. If you exceed £1m, HMRC will assess your capital gains liability at whichever rate applies to each transaction. 

Key Takeaways

Business asset disposal relief (BADR) is a kind of relief that encourages business owners to be entrepreneurial. If you build a strong business and wish to sell qualifying business assets, including shares in your company, provided the transactions qualify and you have not exceeded your personal allowance of £1m, then you will only pay 10% in tax on the chargeable gains.

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