Capital Gains Tax on Selling a Business
Business Asset Disposal Relief (BADR), formerly Entrepreneurs’ Relief (ER), reduces the rate of Capital Gains Tax (CGT) payable when disposing of company assets or selling a business. If you qualify for BADR, the Capital Gains Tax applied on the gain made will be at a lower rate of 10%, compared to the standard rate. The lifetime limit for qualifying capital gains is £1 million for individuals.
We explain who can claim Business Asset Disposal Relief, how BADR is calculated and what is classed as a qualifying business asset.
Who can claim Business Asset Disposal Relief?
Business Asset Disposal Relief is available to individuals, not businesses. To qualify for Business Asset Disposal Relief, the following criteria must apply prior to the sale of your business.
- You owned the company for two years
- You owned a minimum of 5% shares and voting rights
- You are entitled to a minimum of 5% of the proceeds from the sale of the business
- You must be an employee or officeholder of the business, or group
- The business or group must be trading when disposed of
The rules vary if you wish to sell part of your business.
You can claim Business Asset Disposal Relief if you have not yet exceeded your lifetime limit of £1 million. Separate individuals have their own lifetime limit, so spouses or civil partners can submit separate claims if they meet the qualifying conditions. There is no limit on the number of times BADR can be claimed and your lifetime limit can be utilised by a combination of single or multiple claims.
Is Business Asset Disposal Relief the same as Entrepreneurs’ Relief?
Ahead of the 2020 Budget announcement, there were fears that Entrepreneurs’ Relief would likely be scrapped, however, as part of the Finance Act 2020, Entrepreneurs’ Relief was rebranded to Business Asset Disposal Relief as of 6 April 2020. The name was revised as the measure failed to drive entrepreneurial efforts; however, the relief remains the same.
As part of the Finance Act, the BADR lifetime limit was reduced from £10 million to £1 million on qualifying disposals made on or after 11 March 2020 and there are special provisions for certain disposals made before 11 March 2020.
What is a qualifying business asset?
Business Asset Disposal Relief is available where a material disposal is made by an individual, such as:
- Whole or part of sole trade business and assets
- Whole or part of partnership business and assets
- An asset used in a business at the time the business is sold
- Shares or securities in a company
There are further conditions on what makes a qualifying disposal which HMRC detail in their Capital Gains Tax manual, or speak to a member of the Selling My Business team about tax on selling a business.
How can I calculate Business Asset Disposal Relief?
To calculate business asset disposal relief when selling a business, follow these steps:
- Calculate total taxable gains from business sale
- Deduct losses
- Subtract your tax-free allowance if you haven’t yet used it
- Pay 10% of this remaining figure
How can I claim Business Asset Disposal Relief?
You can claim Business Asset Disposal Relief as part of your self-assessment tax return. If you cannot, your claim must be submitted using the Business Asset Disposal Relief Claim Form. You must submit your claim by the first anniversary of 31 January following the end of the tax year in which the qualifying disposal takes place.
Speak to a tax advisor about your tax position when selling a business. Alternatively, your appointed business transfer agent at Selling My Business will liaise with your accountant to ensure that the transaction is handled in a cost-efficient manner.
For more information on how to sell a business, how to structure a business sale and seller financing options, get in touch with our leading team of business brokers. If you are unsure of which asset disposal route is best for you, we can help shed light on the options available, including different types of business sales or a Members’ Voluntary Liquidation.