If you’re planning on selling up, take advantage of this tax break and you could save up to £100,000.
After years of painstakingly building your business, a lucrative sale could fund your retirement or provide a platform for your next venture.
One of the perks for founders and shareholders (with certain exceptions, as explained below) is the potential for reducing your Capital Gains Tax (CGT) liability through Business Asset Disposal Relief (BADR).
Formerly known as Entrepreneurs’ Relief, BADR is a tax break on the first £1 million of proceeds when you sell your business, meaning you can save up to £100,000. Despite changes in 2020 that saw the relief reduced from £10 million to £1 million, BADR remains among the most tax-efficient forms of capital extraction for a business owner.
But to maximise your allowance, it’s important not to get caught out by common mistakes that can see you pay more tax than is required, and this is where advice can be invaluable. Here are some of the key questions to ask.
What is BADR?
BADR is a tax break that allows a company owner or other qualifying parties to be taxed at 10% on the proceeds of a sale of shares or assets, rather than some or all of the gain falling into the 20% rate of CGT. The relief has a maximum lifetime value of £1 million.
How do you qualify?
If you’re selling all or part of your business, you must be a sole trader or business partner and you must have owned the business for at least two years.
If you’re an employee or a director of the business being sold, you must own at least 5% of the ordinary share capital and voting rights, and have done so for at least two years before the sale.
Can spouses and civil partners use BADR?
They can individually qualify for a separate £1 million allowance, but only where they have met the qualification requirements outlined previously, including having held shares in the business for two years or more prior to the sale. With careful planning, transferring shares to a spouse can help increase your tax break.
Do all companies qualify?
To do so, it must be a trading company, which is defined by HMRC as a “company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities”.
In short, that means that if you have more than 20% of assets from non-trading activities, such as investing profits in commercial or residential property or renting out property, then you may not qualify for the relief. Similarly, if you have built up a large cash surplus in the business, you may not be able to claim BADR unless you can prove that the cash is being set aside for future trading activity.
Is the tax benefit of BADR the only reason you want to sell your business?
If the answer is yes, you might want to reconsider. Most business owners decide to sell up because they know the timing is right for them and their family to exit. It can often be because they’ve lost their passion, running the business has become too stressful or a good offer comes along. When it’s the right time to sell, BADR acts as a nice perk – but it shouldn’t drive your decision.
Why should you make sure you qualify for BADR?
Selling your business and paying only 10% tax on the first £1 million of the proceeds is an attractive proposition for any business owner. Not only that, but a lucrative sale is ultimately going to come from the quality of your business. If you can demonstrate strong growth potential; proper recordkeeping; clean books; written contracts with customers, staff and suppliers; and protected intellectual property, then your chances of a successful sale are high.
How and when do you claim?
BADR must be claimed by the first anniversary of the 31 January following the tax year in which the business was sold. For example, if a disposal is made in the tax year ending April 2023, a BADR claim must be made by 31 January 2025. A claim should be made as part of your self-assessment tax return.
If you’re considering selling your business, contact us today for support and advice.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.