What is Business Assets Disposal Relief?

Business Assets Disposal Relief (BADR) is a valuable tax relief that can help business owners reduce their tax liability where they dispose of part or all of their business. It’ll be most relevant to those who are planning their business exit strategy, whether it’s because they want to retire or simply do something else. Business owners can choose to wind up their business and release the capital, sell it on to someone else, or pass it onto children (or others) as a gift, but these scenarios can all lead to a substantial capital gains tax (CGT) bill. This article will therefore help you understand how you can use BADR to effectively plan any future business disposal to ensure you do not have to pay more tax than you need to.

What is Business Assets Disposal Relief (BADR)?

BADR is a form of capital gains tax relief that can help you reduce the amount of capital gains tax liability when you dispose of qualifying business assets.  It was previously known as Entrepreneurs’ Relief until it was renamed BADR in 2020. There are little differences between the two, but the main change is the significant reduction in the lifetime limit which we’ll explain in more detail in a later section below.

The tax relief was intended to encourage entrepreneurship and therefore stimulate the UK economy. The thought behind this was that people would be more likely to start their own business and invest in growing it if they did not have to worry about paying high taxes when they wanted to dispose of it. Whilst there is insubstantial evidence to support this claim, the Government’s Non-Structural Tax Relief Statistics (December 2023) did estimate that the value of the relief claimed for the tax year 2023/24 was £1.5 billion. In our opinion, it’s still well worth claiming whilst still available as the tax reduction is substantial.

How does BADR work?

BADR works by allowing you to dispose of qualifying business assets at the minimum rate of capital gains tax. There are four different rates depending on your income tax band and the type of asset you are disposing. Basic rate income taxpayers are liable to pay 10% on most assets and 18% on residential property whereas higher and additional income taxpayers must pay 20% on most assets and 28% on residential property. By claiming BADR the CGT on qualifying business assets will only be subject to a 10% tax rate regardless of your income tax band.

What are qualifying business assets for BADR?

Firstly, an important note to be clear on is that BADR can only be claimed where there is a material disposal of business assets. This means that the disposal of assets has to result in a substantial reduction or termination of business operations. Disposing of business assets separately will only qualify if the disposal is associated with a material disposal. Simply disposing of business assets will not qualify and you will be subject to normal rates of CGT (or corporation tax if you continue running the business through a limited company).

What this means is that you cannot simply be selling business assets and claim BADR – you must be selling the assets as part of closing down or passing on your business. For example, you run a factory where you decide to sell half your machinery. If the reason for this is because you are replacing it with upgraded versions, then you’ll be subject to normal CGT where you make a profit. On the other hand, if you are selling half your machinery because you are reducing your production output in preparation of closing down your business then this may qualify for relief.

Due to the generous nature of BADR there are strict rules on qualifying conditions depending on the type of asset that is being disposed of:

• All or part of your business interest

‘Business interest’ only applies to sole traders or partnerships because this refers to how neither business structure is owned through shares and shareholders. You’re able to sell or gift an entire business as a whole or only part of a business and claim BADR so long as you have owned the business for at least two years.

Where you are only disposing part of your business then it must also meet the qualifying condition that the part being disposed of can continue to operate independently. For example, you own two bakeries and sell one of them. The one that has been disposed of is able to continue to run independently of the other and therefore would qualify. However, if the situation were slightly different whereby you still own two bakeries but one is substantially bigger and produces the goods that are supplied to both; and you sold the smaller bakery, then it is unlikely that BADR could be claimed. This is because the smaller bakery would be reliant on the supply from the larger bakery and could therefore not carry on trading independently.

• Assets used in the business

In some situations (usually applicable to sole traders) assets used in a business are sold off or gifted away, but only after the business has already ceased trading activities. In this case, the disposals are still treated as associated disposals with the material disposal being the cessation of the business even though they do not occur at the same time.

These assets can qualify for BADR so long as the business has been running for at least two years prior to its termination and the assets are sold within three years from the date of disposal. The assets do not have to be held for two years but simply still in use for the business at the time of closing.

For example, you have been running a landscape business for 10 years but decide to retire. You have a range of assets including a van, lawn mower and other tools and equipment which you eventually get to disposing of after a year. Were you to have sold these assets whilst still running your landscaping business, you would not qualify for BADR. However, in this instance the assets are sold as a result of the ending of your business and so qualify.

• Shares or securities in a limited company

When it comes to shares or securities in a limited company, this is one type of asset that does not necessarily have to be held by the owner of the business. It can be held by officers of the company (directors) or employees. To qualify there is the same qualifying period of two years which means you must have held the shares for a minimum of 2 years before disposing of them.

Additionally, in order for the shares (or securities) to qualify they must be for a ‘personal company’. A personal company is defined where the shareholder owns at least 5% of both the ordinary shares and voting rights of the company and either a) is entitled to at least 5% of the company’s distributable profits and 5% of the assets upon the company being wound up or b) is entitled to at least 5% of the proceeds from the sale of the company’s entire ordinary share capital.

• EMI shares in a limited company

If you hold shares in a limited company under an EMI (Enterprise Management Investment) option then the above rules are relaxed. The 2-year qualifying period will be treated as such from when you received the share option as opposed to acquiring the actual shares. Not only that but you will be exempt from the 5% share ownership requirement.

What assets do not qualify for BADR?

The main rule that applies to all disposals in order to qualify for relief is that they must be from a business that is trading. This therefore excludes assets from investment businesses such as those that hold rental property or investment portfolios. For the time being and current 2024/25 tax year the exception to this is where a business holds furnished-holidays-lets (FHL) but this is due to change come April 2025 when FHL are planned to lose their advantageous tax treatments. Should your business be involved with some investment activity, disposals can still qualify so long as the non-trading activity is not substantial. HMRC considers anything of 20% or more to be substantial, which can be measured by business turnover, balance sheet assets and staff.

Who can claim BADR?

As BADR was previously called Entrepreneurs’ Relief, it was mistakenly thought that only entrepreneurs were eligible to claim. In fact, it’s widely available to most individuals with a business interest:

• Sole traders
• Partners in a partnership
• Officers in a limited company (directors)
• Employees in a limited company
• Trustees

BADR cannot be claimed by limited companies. This is because they are not subject to CGT but corporation tax instead. BADR cannot offer corporation tax relief. 

How much tax relief can I claim through BADR?

The maximum you can receive in tax relief through BADR is £1 million and this is also a lifetime limit. This means that you can make as many qualifying disposals as you like and claim BADR each time until you have exhausted the £1 million limit in tax relief.

Previously, when BADR was known as Entrepreneurs’ Relief, the limit was much more generous and allowed up to a lifetime limit of £10,000 million. However, it is now unsure as to whether there are governmental plans to scrap BADR altogether so our advice would be to utilise it whilst still available.  

How to claim BADR

Once you have made your disposal, you will need to ascertain whether you have made a gain and therefore incurred CGT liability. Whilst this is simple to determine where you have sold business assets, it is not always clear to establish where you pass on your business as a gift. For example, you may decide to handover the reins to your children when you wish to retire (a note to make here is that this scenario could also potentially lead to inheritance tax liabilities in certain circumstances). In this case, you may need to attain a valuation to determine if any CGT is due.

There are two ways to claim BADR. The first option will be the more common route. Any type of CGT liability must be declared via a self-assessment tax return by the 31^st January following the end of the tax year the disposal was made. There will be a specific section to report your CGT and claim BADR.

If you are unable to complete your claim through a personal tax return, you can do so in writing and completing a HS275 claim form. You must attach your tax computations alongside this form and send it into HMRC.

Get help with claiming business assets disposal relief

If you’re struggling to get your head around the complex requirements of BADR we can help confirm your eligibility. Our comprehensive service will help you to accurately calculate your CGT liability and submit a claim for BADR through your self-assessment tax return. If you’re not quite ready yet but are starting to think about a business exit, why not explore our tax planning options? Get in touch to discuss your business and tax needs.