What was formerly known as Entrepreneurs Relief is now known as Business Asset Disposal Relief (BADR). It is a tax relief benefit that can reduce the Capital Gains Tax (CGT) that is paid on the sale of the assets of a solvent company that is either being liquidated or sold.
When a solvent company is liquidated, it is through a Member’s Voluntary Liquidation process in accordance with the laws dictated by the Insolvency Act 1986. When the assets of the solvent liquidated company are sold, CGT is applied but directors of the company that qualify for BADR are able to pay half the amount of tax on the capital gains rather than the standard amount. So, how does Business Asset Disposal Relief work?
What is Business Asset Disposal Relief?
Business Asset Disposal Relief (BADR) is a tax relief scheme from HMRC that reduces the amount of tax directors of a solvent liquidated company will pay on the sale of the company’s assets and shares, up to £10 million, in value in a Members’ Voluntary Liquidation (MVL) process. The standard rate of CGT is 20% on the capital gains of a sale, i.e. the profit (if there is a profit) but by claiming BADR, only 10% tax on the capital gains is paid, potentially saving as much as £1 million in the claimant’s lifetime.
Whilst BADR is applicable to any company, from sole traders to limited companies, to claim BADR, the company must have been a trading company or part of a trading group.
For partnerships being voluntarily liquidated and owned by couples, they can both claim Business Asset Disposal Relief, but they must do so on an individual basis, not jointly. Each partner must have been employed by the company as a director and own a minimum of 5% shares to qualify for BADR.
What are the eligibility criteria for BADR?
To claim Business Asset Disposal Relief, at least one of the following criteria over a two-year qualifying period, ending on the date the asset was sold or the business was closed as part of the MVL process (if earlier than the asset being sold):
- All or part of the business is being wound up in which you were a sole trader or business partner. You are still eligible if the assets are sold at a later date, but they must be sold within three years of the business closing. You must also have owned the business for more than one year before its closure, and the assets are sold.
- A minimum of 5% of the shares, securities or voting rights within the company being closed are owned or have been bought at least one year before the business was closed and the assets sold. This means you had to have been an employee of the company for more than a year.
- You lent the business an asset, and it is being sold as part of the business closure. However, this only applies if the asset in question was used for at least one year prior to the business being closed and the asset being sold.
- You are selling shares you received via an Enterprise Management Incentive scheme after 5th April 2013.
Assets must also qualify for Business Asset Disposal Relief. They must have been sold within three years of the business closing. In addition, any asset being sold that is property must have been owned exclusively by the business, such as a warehouse, factory or shop, and used free of rent. If you remain the landlord of the property as part of a portfolio, it is considered an investment and not an asset.
To claim BADR, the disposal of assets must fall into the following categories to qualify:
- Assets that were used in the solvent liquidated business and disposed of within three years of the date the business closed excluded shares and securities but included assets held as investments.
- Assets that are shares and/or securities in the company that are disposed of (i) while the company was trading and the shares were in a holding company or group of companies, (ii) within three years from the date the company was closed as a trading company or part of a trading group.
- Assets owned personally but used in the business whereby you were in a partnership, or the asset was held by your personal trading company (or trading group) – these are known as associated disposals.
How to claim for Entrepreneurs Relief?
During a lifetime, you are allowed to claim Business Asset Disposal Relief up to £1 million, no matter how many times you claim the tax relief. However, if you make a claim above this limit, you will be liable for the standard tax rate of 20%.
There are two ways to claim BADR:
- Via a Self-Assessment Tax Return – if you were a sole trader of a solvent liquidated company or a partner, you are able to claim BADR on your Self-Assessment Tax Return form when you submit it to HMRC.
- Via a Business Asset Disposal Relief form – you can use this form whether you are a qualifying beneficiary of BADR and/or a trustee of a settlement. You will need to detail the asset on which you are claiming tax relief and include your capital gain calculation as well as the amount of tax relief you are due.
Any claim for BADR must be submitted by the first 31st January anniversary after the end of the tax year in which the company was liquidated. In addition, the claim/tax return date is the date of the distribution of the funds released by the sale of the assets during the MVL process that is applied, not the date the MVL was started.
Company or individual insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has in recovering. If you are struggling with debt, are considering winding up a solvent company or declaring bankruptcy, contact Simple Liquidation for assistance. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.