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Business Asset Disposal Relief

Business Asset Disposal Relief

Business Asset Disposal Relief, previously known as Entrepreneurs’ Relief, is a valuable tax relief that reduces the amount of Capital Gains Tax (CGT) paid when disposing of certain business assets. It allows entrepreneurs to pay a reduced 10% rate of CGT on gains made on disposals of qualifying business assets up to a lifetime limit of £1 million.

This relief provides a substantial tax break to business owners and investors when they sell or transfer their business assets. With CGT rates normally at 10% and 20%, having to pay just 10% tax on gains up to £1 million is a significant saving.

This comprehensive guide will explain everything you need to know about Business Asset Disposal Relief including who qualifies, what assets are covered, how to claim and practical examples.

Overview of Business Asset Disposal Relief

Introduced in 2008, the purpose of Business Asset Disposal Relief is to support entrepreneurship and business growth in the UK by incentivizing long-term business investment. It achieves this by reducing the tax burden when disposing of qualifying business assets that meet certain conditions.

On 11 March 2020, the lifetime limit was reduced from £10 million to £1 million per individual. This substantially reduced the tax relief available but it still offers a valuable tax break, especially for smaller businesses or partial sales of assets.

The key features of Business Asset Disposal Relief are:

It reduces the CGT tax rate from 10%/20% down to 10% on qualifying gains
There is a lifetime limit of £1 million gains per individual qualifying for the relief
Specific conditions must be met over a 2 year qualifying period
It applies to individuals and some trusts but not companies
A written claim must be made within specific time limits
By paying just 10% CGT on the first £1 million gains, compared to normal CGT rates, the relief provides a simple way for business owners to reduce their tax bill upon disposal.

Who Can Claim Business Asset Disposal Relief?

The relief is aimed at business owners and investors, whether trading as a sole trader or partnership or through a company. The key requirements are:

Individuals: Any individual can claim Business Asset Disposal Relief if they meet the qualifying conditions for relief on their disposed assets. This includes sole traders, business partners, company directors and investors.

Spouses and civil partners are treated separately for the relief and each has their own £1 million lifetime limit.

Trusts: Some trusts can also qualify for Business Asset Disposal Relief if specific conditions are met. The disposal must relate to assets used in a qualifying beneficiary’s business or shares in their personal company.

The claim is made jointly by the trustees and qualifying beneficiary. Only certain trusts with qualifying life interest beneficiaries can claim the relief.

Companies: Limited companies and other corporate entities cannot claim Business Asset Disposal Relief. Only individuals and qualifying trusts are eligible.

Personal Representatives: A person’s Personal Representatives can claim Business Asset Disposal Relief on behalf of the deceased if the disposal occurred while they were still alive.

What Assets Qualify for Business Asset Disposal Relief?

To qualify for Business Asset Disposal Relief, the disposed assets must fall into certain categories and meet the broader qualifying conditions:

Categories of Qualifying Assets

All or part of your business – This includes disposal of a sole trade or partnership interest and assets such as property and goodwill. Investments like shares do not qualify.
Assets used in your business and disposed of within 3 years of cessation – Business premises, equipment and other assets can qualify if sold within 3 years after ceasing trading.
Shares in your ‘personal company’ – At least a 5% shareholding is required to qualify, plus other conditions around being a trading company and your employment.
Assets you own used by your business or company – For example, you own the business property personally which your company trades from.
In all cases, certain broader conditions must also be met for the assets to qualify for the relief:

General Qualifying Conditions

Owned the asset for at least 2 years before disposal
The business must have been trading for at least 2 years before disposal or cessation
You must have at least 5% interest in the shares or partnership assets
You must work in the business as an officer, employee or business partner
There are some restrictions around ownership of shares and assets via other entities such as partnerships and joint ventures. Additional conditions also apply in relation to trusts claiming the relief.

Claiming Business Asset Disposal Relief

To benefit from the 10% CGT rate under Business Asset Disposal Relief, you must actively make a claim for the relief – it is not given automatically.

Who Can Make a Claim?

For individual disposals, the claim must be made by the individual who owned the assets. For qualifying trust disposals, the claim is made jointly by the trustees and qualifying beneficiary.

How To Claim

There are three main ways to claim:

In your Self Assessment Tax Return if you have one for the tax year of disposal
By writing to HMRC detailing your claim before the 1 year claim deadline
Using the formal Claim for Business Asset Disposal Relief form
Claim Deadlines

The time limit for making a claim is tight. Your written claim must reach HMRC within 1 year after the 31 January following the end of the tax year in which you disposed of the asset.

For example, for disposals in the 2020/21 tax year, claims must be made by 31 January 2023. You can make multiple claims over time up to your £1 million limit.

Calculating Business Asset Disposal Relief

Where a valid claim is made for Business Asset Disposal Relief, you calculate the gain eligible for relief as follows:

Aggregate all qualifying gains and deduct qualifying losses on the disposal to reach a total net gain figure.
Deduct the Annual Exempt Amount (where available) from this net gain.
The amount of the remaining net gain that falls within your lifetime limit of £1 million is charged at just 10% CGT.
Any excess above £1 million is charged at normal CGT rates (10% or 20%).
This provides a substantial tax saving on the first £1 million gains from qualifying business asset disposals.

Lifetime Limit of £1 Million

The relief comes with a £1 million lifetime limit per individual, reduced from £10 million in March 2020. This limit applies to the total gains eligible for Business Asset Disposal Relief over your lifetime.

Once you have claimed the limit fully, any further qualifying gains will be taxed at your normal CGT tax rates. However, most small business owners will not reach anywhere near the lifetime limit.

Spouses and civil partners each have their own separate £1 million limit allowing up to £2 million per couple to qualify for 10% CGT.

Business Asset Disposal Relief in Practice

To understand fully how Business Asset Disposal Relief works, it is helpful to look at some practical examples:

Example 1 – Selling a Sole Trade Business

John has run a sole trader gardening business for the last 8 years. He sells his entire business including equipment and customer lists for a total gain of £500,000.

John claims Business Asset Disposal Relief. His total net gain is within the £1 million lifetime limit so he pays just 10% CGT on the full £500,000 gain. Without the relief he would have paid 20% CGT on the gain.

Example 2 – Property Owner and Tenant Company

Mary has owned a commercial office building personally for 10 years and rented it to her company which carries out consulting work there.

She sells the office building for a £600,000 gain. Alongside this, Mary reduces her shareholding in the company from 60% to 30% realizing a £200,000 gain.

The property gain qualifies as an ‘associated disposal’ due to the linked company share sale. Mary claims Business Asset Disposal Relief on the total gains of £800,000, paying 10% CGT on the full amount.

Example 3 – Company Share Sale After Cessation of Trade

Alan’s technology company ceased trading in March 2019. In January 2021, he sells his remaining 30% shareholding realizing a £1.5 million gain.

Although the company is no longer trading, Alan qualifies for Business Asset Disposal Relief because the shares were sold within 3 years of the company ceasing trade. He pays 10% CGT on £1 million of the gains under his lifetime limit.

Conclusion

Business Asset Disposal Relief provides a valuable tax break to entrepreneurs and investors when selling qualifying business assets after meeting certain conditions. While the lifetime limit is now lower at £1 million, this still allows substantial gains to benefit from just 10% CGT.

Careful planning is required to ensure disposals qualify and making a timely written claim is essential to benefit from the relief. But overall, Business Asset Disposal Relief offers a simplified way for business owners to reduce the tax burden on the sale of their business assets.