What is Business Asset Disposal Relief and How Often Does it Work?

When solvent companies are being closed through a Members’ Voluntary Liquidation (MVL) process, the directors are able to claim back money through the Business Asset Disposal Relief (BADR) as a way of mitigating how much Capital Gains Tax (CGT) is paid.

Formerly known as Entrepreneurs Relief, which was introduced in 2008 to replace Business Asset Taper Relief, the idea was to recognise the years of hard work company owners and directors had put into starting and growing a business.  That included the risks financially people had taken over the years in building a successful business.  Whilst the qualifying criteria has changed and tightened over the years, and the level applicable for claiming dropped to £1 million, company owners and directors winding up a business using an MVL have been able to reduce their rate of CGT to 10%.

What is Business Asset Disposal Relief?

According to HMRC, BADR is a form of tax relief that reduces how much Capital Gains Tax (CGT) a company owner, shareholder or director will pay on qualifying business assets when winding up a solvent company using an MVL, on or after 6th April 2008.

Qualifying business assets are the shares and assets sold as part of the liquidation process from which owners, shareholders and directors of the company benefit financially.  It’s these profits that are subject to CGT.

What are the qualifying criteria?

To claim BADR in respect of shares being sold in the company by an individual, and in some cases, trustees, there are very specific criteria that must be met:

  • The seller of the shares must have been an officer, i.e. director or shareholder, or an employee of the company;
  • They must have owned a minimum of 5% of ordinary shares;
  • They must have been able to exercise a minimum of 5% of the voting rights; and
  • They must have held the shares for at least 2 years prior to the date of the disposal of the shares.

Within that 2 year period, the seller of the shares must also meet what is called the proceeds test, as follows:

  • Have a minimum 5% interest in the company’s distributable profits, and be entitled to a minimum of 5% of the assets available to share (or equity) holders when the company is being wound up; and
  • Be entitled to at least 5% of the disposal proceeds of the company’s entire ordinary share capital.

HMRC make three assumptions with regard to the proceeds test, which are:

  • The entire ordinary share capital is disposed of, at market value, on the last day of the 2 year period;
  • That the seller’s share of the disposed assets proceeds is the same amount the seller would expect to receive and be entitled to at the time; and
  • That the effect of the avoidance arrangements is disregarded.

What asset disposals qualify for Business Asset Disposal Relief?

As well as share capital, there are other disposals that qualify for BADR, as long as the disposal is made by the individual, including:

  • The transfer of part of all of the company, which the seller owned as a sole trader or business partner for a minimum of two years, which ends on the date of the disposal;
  • The disposal of any assets that were used for the company’s purposes when it ceased trading; and
  • The disposal of assets that are owned personally but used by the company, as well as the disposal of a minimum of 5% of the seller’s interest in the company, and other related conditions.

If the disposal assets, or shares, originate from an enterprise management initiative, the 5% minimum no longer applies.  Alternatively, when the company ceases trading the seller has three years in which to sell their shares in order to claim BADR.

If the seller has lent their assets to the company, they must sell a minimum of 5% of their part of a partnership or their shares in a personal company.  In addition, the assets must have been used for at least one year before they were sold, or the business was closed.

Why claim Business Asset Disposal Relief?

The biggest benefit to claiming BADR is the reduction in the Capital Gains Tax, which can fall from 20% to 10%.  This reduction enables those that benefit from the sale of the assets of a company that is closing down to hold onto a greater level of the profits, also known as gains.

However, there is a lifetime limit applicable to disposals which impacts how much a person can claim in any two year qualifying period, as follows:

  • 6th April 2008 to 5th April 2010 – £1 million
  • 6th April 2010 to 22nd June 2010 – £2 million
  • 23rd June 2010 to 5th April 2011 – £5 million
  • 6th April 2011 to 10th March 2020 – £10 million
  • 11th March 2020 – £1 million

Are there any other tax reliefs applicable to the sale of shares?

If you don’t meet the qualifying criteria for Business Asset Disposal Relief, Investor’s Relief may be an option.  Introduced in 2016, this also reduces the level of CGT to 10%, based on lifetime gains up to £10 million.

It can only be applied to the sale of ordinary shares in trading companies that are unlisted by people who are not officers or employees of the company, or sometimes trustees.  As well as qualifying criteria, the shares must have been owned for a minimum of three years and issued on or before 17th March 2016.

An alternative option is to sell a high level of the shares to an Employee Ownership Trust (EOT), which would not be subject to CGT.  However, other criteria apply.

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, contact Simple Liquidation for assistance.  For more information on how our professional insolvency practitioners may be able to help your business, contact us today.