Nobody wants to be hit with a large tax bill when selling or giving away their business assets.
With business asset disposal relief, you can cut your tax bill by up to 18% without getting on the wrong side of HMRC.
What is business asset disposal relief?
Business asset disposal relief (BADR) is a legitimate way to reduce the amount of capital gains tax (CGT) you pay on disposed business assets.
It used to be known as entrepreneurs’ relief (ER) until it was changed under the Finance Act (FA) in 2020.
There are three types of business assets that you may be able to claim BADR on:
- A sole trader business or partnership that you fully or partially own
- Shares or securities (like loan stock) in a company
You may also be able to claim BADR if you’re closing your company.
You can find detailed information on the government’s business asset disposal relief page.
Which types of business can claim BADR?
BADR can only be claimed on certain business structure types.
- Sole trader operations
- Partnerships (such as an LLP)
- A personal company (also known as a PSC)
- Joint ventures
- Trusts that hold business assets (such as a share of a family business)
You must also have owned a trading business, or shares in one, for at least two years before any asset is disposed of.
You can also claim BADR if you own at least 5% of the total shares of a company and are either an employee or officeholder (such as director of the business).
This includes shares from an Enterprise Management Incentive (EMI) which have been held for at least two years.
How much does BADR reduce your tax bill?
If you’re eligible for BADR, you could enjoy significant savings on your CGT bill. Each individual has a £6,000 CGT allowance (for the 2023-24 tax year).
For standard residential property gains (if the property isn’t your main home), basic rate taxpayers pay 18% CGT on any profits, while higher rate taxpayers pay 28%.
If that property is a BADR-qualifying asset, both basic and higher rate taxpayers would pay just 10% CGT — saving up to 18% tax.
If you make £1 million in profit from a property, BADR could save a higher rate taxpayer £180,000.
What does disposing of an asset mean?
Disposing of an asset can mean a few different things.
For most people, it will mean selling a business or associated assets, ideally for a profit.
However, disposal can also refer to:
- Giving away part of your business, shares or a business asset
- Swapping a business asset for something, which may have a higher value
- Gifting or selling all or part of your business shares
- Being compensated for a stolen or damaged asset (for example, by an insurance company)
For example, let’s imagine you run a salon with a partner. You may choose to step away from the management side but still work in the salon, selling your share of the business to your partner.
You can claim BADR on the gains you make from your partner buying you out.
How do I claim BADR?
It’s relatively simple to claim BADR. Most people will do it through their self-assessment tax return, but you can also do it by filling in Section A of the business asset disposal relief help sheet.
If you’re not sure how to do this, it’s best to speak to your accountant.
Can I claim BADR if my business stops trading?
Yes — but there is a time limit. You have up to three years to sell your shares and other assets and claim BADR.
Is there a limit on how much BADR you can claim?
Over the course of your lifetime, each individual can claim BADR on up to £1 million of related gains.
Married couples who run a business together may be able to maximise their reliefs by separately claiming their share, potentially getting up to £2 million in relief — but it’s best to seek advice before doing this.
The BADR limit has been greatly reduced since 2020 when the limit stood at £10 million. Once you reach the £1 million limit, you’ll return to paying CGT at the standard rate for your tax bracket.
There are broader limits on BADR too.
It can only be claimed by individuals who are company owners like a freelancer or sole/part owners of a small business, rather than businesses in general such as a national or multinational insurance company.
BADR can also only be claimed on business assets and not a business owner’s personal investments.
Finally, it can only be claimed by a trading business, so it cannot be claimed on assets owned by a business you’ve ceased trading through.
What are the alternatives to BADR?
There are a few other alternatives to BADR, including:
- Investors’ relief
- Seed enterprise investment schemes (SEIS)
- Employee ownership trusts
If you’re not sure of the best option for your unique situation, it’s best to get professional advice.
Find an accountant or financial adviser you can trust with Unbiased.