Following the disposal of an asset, a tax relief known as Business Asset Disposal Relief might be applicable and it relates to paying a lower Capital Gains Tax. The Finance Act updated this in 2020 and it was once called Entrepreneurs Relief. So, we are going to help you understand what Business Asset Disposal Relief, what it is and how it impacts Capital Gains Tax.
Business Asset Disposal Relief (BADR) – What is it?
In order to learn about BADR, it helps to understand what Capital Gains Tax is. This is a tax that is paid on all profits that are made when an asset is disposed of. As the profit is considered to be a gain, you will need to pay Capital Gains Tax.
Disposal of An Asset – What Does it Mean?
There are many different meanings to this as it is not linked solely to selling an asset. This is because it can also relate to swapping assets or giving them away. Furthermore, it can also mean that you have been compensated for the loss or theft of an asset or an asset is being disposed of as part of business shares when a limited company is closed or when ownership comes to an end.
Claiming BADR
For those individuals running a business or undertaking the disposal of an asset within the business, they will be able to take advantage of BADR. This disposal might involve selling shares or even selling a whole business. So, BADR will only apply to these types of businesses:
- Partnerships
- Sole Trader
- Personal Company
- Joint Ventures
- Trust
If You Claim BADR, What Amount of Capital Gains Tax Will You Pay?
There is a Capital Gains Tax rate that is set at 10% that individuals have to pay when it comes to BADR. This is paid on any business assets that qualify for it and generate a gain. This reduces the amount of tax that higher rate taxpayers will have to pay as the rate they pay drops to 10% instead of the 20% that they usually pay.
BADR – Are There Any Restrictions On Its Use?
This is not applicable to companies, which means that BADR can only be used by individuals who run their own business or own company shares. It’s only possible to take advantage of it with those assets that qualify while it cannot be used when investment assets are disposed of.
Claiming BADR Relief – Eligibility Criteria
There are criteria in place that you will have to meet in order to claim BADR. To begin, the company or business must be considered a trading business while prior to selling the business or ceasing trading, the sole trader or partnership must have a minimum of two years of trading. When it comes to shares, you cannot hold fewer than 5% of total shares and you must have held them for a minimum of two years. Finally, all shareholders must have been considered either an officeholder or an employee for a minimum of two years prior to the sale.
