When can I use Business Asset Disposal Relief?

When can I use Business Asset Disposal Relief?

Business Asset Disposal Relief is a kind of tax relief which allows company directors reduce Capital Gains Tax after disposing of an asset.

Capital Gains Tax (or CGT) is a tax you pay on any profits you make after disposing of an asset, which we’ve mentioned in a different blog. Essentially, the profit is a ‘gain’ and CGT is the tax you pay on that gain.

Normally, you pay 20% CGT on the the profits made. But with Business Asset Disposal Relief (BADR), a company director pays just 10% in CGT. The lifetime limit for BADR is £1million on qualifying assets. BADR replaces Entrepreneurs Relief, which ended in 2020. That means the £1million lifetime allowance includes any Entrepreneurs Relief you may have already received.

Who qualifies for Business Asset Disposal Relief?

Only individuals who own a business or have shares in a company can apply for BADR. It only applies to qualified disposals of assets and cannot be used to dispose of investment assets.

Companies do not qualify for BADR and it can only be used by people who own or have shares in trading businesses.

How does it work?

If the conditions (which we mention below) are met and the lifetime allowance hasn’t already been met, all gains on the disposal of a business asset are reduced to 10% CGT.

BADR can be claimed an unlimited number of times. But, remember, there is a lifetime limit of £1million. Claims can only be made on the entire disposal and not a proportion of it.

Claiming the tax relief is done through the self-assessment tax return of by filling in a BADR help sheet.

You can find that here on the government’s website. If you’re making a claim, you must do that by the first anniversary of January 31 following the tax year of disposal. So, for disposals in the 2022/23 tax year, you must claim by January 31, 2025.

What are the conditions?

There are a few conditions to satisfy before you can claim for BADR. The first is that the asset must be ‘qualifying business disposal’. This includes a material disposal of business assets.

Disposal of business assets

A disposal of a business asset is:

  • The disposal of whole or part of a business.
  • A disposal of (or interests in) one or more assets in use at the time at which a business ceases to be carried on, for the purposes of a business
  • Disposal of one or more assets consisting of (or interests in) share or securities of a company.

When either of the following is satisfied, it is counted as ‘material’:

  • The business is owned by the individual in the two years before the disposal.
  • It is owned by the individual in the two years before the date the business ceased to trade and the asset is disposed of within a three-year period after the date cessation.

Where the disposal is share of securities, it is ‘material’ if within two years prior to the disposal the company:

  • is a trading company or the holding company of a trading group, or;
  • is the individual’s ‘personal company’ and the individual is an officer or employee of the company.

The ‘personal company’ means that the person holds at least 5% of both ordinary share capital and voting rights of the company. Also, the individual must be entitled to either 5% of the company’s profits or 5% of the proceeds when the company is sold.

What to do next

If you meet the criteria, BADR is an effective tax planning tool. As well as offering a significant saving on its own, it can also be tied to larger plans to boost efficiency.

We can help advise you and explain further how BADR can help you, so contact us today. Fill in the form below and one of our team will be in touch.