The total gains of an individual attracting relief are subject to a lifetime limit of £1 million. The maximum CGT saving as a result of BADR is therefore the difference between paying tax on £1 million at 20% and paying the tax at a rate of 10% - a potential saving of £100,000.
Qualifying for Business Asset Disposal Relief
BADR is available where there is a disposal of a business (or part of a business) or to individuals disposing of shares in their personal trading company. Disposal of assets used in the business may also qualify for relief.
BADR is available to sole traders, partners and certain company shareholders. It may also be available in circumstances to trustees by reference to the beneficiaries of the trust. The relief is not available to capital disposals within a company.
For individuals selling all or part of their business, to qualify for the relief there is a requirement to be a sole trader or business partner for at least two years up to the date of the business sale. In addition, the business assets being sold usually need to be owned for the same period.
In the case of an individual selling shares in a company, the business must be a ‘personal trading company’ in order to qualify for relief. To meet this condition the shareholder must be either an employee or office holder of the company, hold at least 5% of the ordinary share capital and be entitled to at least 5% of the votes. In addition, the shareholder must also be entitled to at least 5% of either the profits that are available for distribution and assets on winding up the company, or disposal proceeds if the company is sold.
These conditions must have been met for at least two years leading up to the date of the disposal.
There are several potential pitfalls that can catch out the unwary and cause the relief to be lost. Some common examples we see in practice are as follow:
For companies, it is required that the main activities are in trading, opposed to non-trading activities like investments – or it is the holding company of a trading group, to obtain relief. If the company has a significant amount of non-trading activity or assets, you may not qualify for relief. HM Revenue & Customs (HMRC) usually take ‘significant’ to mean 20% - judged by a mixture of turnover, net assets, profit and time spent by directors and employees.
Where part of a business is being sold there can be a fine dividing line between what actually constitutes the disposal of part of a business and what is merely a disposal of assets from within a continuing business. BADR is denied in the latter case.
Shares in a company can often be transferred to a spouse or civil partner to utilise any unused CGT annual exemption. However, if they have not met the BADR ownership conditions in their own right they may not qualify for BADR, worsening the overall CGT position.
With consideration of the complexity of the tax rules and potential pitfalls, it is recommended to take tax planning advice in advance of selling your business to ensure, where possible, that BADR is not lost.