What is Business Asset Disposal Relief?

How does Business Asset Disposal Relief work and am I eligible?

Business Asset Disposal Relief (BADR) is a tax relief scheme that reduces the rate of Capital Gains Tax payable on the profit you make when selling or disposing of business assets. So, if you plan on retiring or closing a solvent limited company you no longer need, BADR is something to be aware of.   

Here we discuss how Business Asset Disposal Relief works, the relief it provides and whether you might be eligible. 

Understanding Business Asset Disposal Relief

Business Asset Disposal Relief reduces the financial burden on company directors and business owners when they dispose of business assets or sell shares in their company. Formerly known as Entrepreneurs’ Relief, the scheme aims to encourage entrepreneurs to start and invest in their businesses.   

When you decide to sell or liquidate a solvent business, you will pay Capital Gains Tax on any profit on your original investment. Following the Autumn Budget 2024, the rate of Capital Gains Tax payable on disposals made on or after 30 October 2024 is 18% and 24% for basic and higher-rate taxpayers respectively.

However, if you are eligible for Business Asset Disposal Relief, it reduces the rate of CGT you pay to just 10%. That will rise to 14% in April 2025 and 18% in 2026. There is no limit on the number of businesses you can sell or close to qualify for the scheme, but there is a lifetime limit of £1 million of qualifying gains. 

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Who is eligible for Business Asset Disposal Relief?

You may be eligible to claim Business Asset Disposal Relief when you dispose of ‘qualifying assets’. Qualifying assets include the entire business, part of the business or shares. 

To be eligible for BADR, you must meet the following criteria:

• The business or company must have been trading
• A sole trader or partnership must have traded for at least two years before its sale or closure
• Company shareholders must have held at least 5% of the shares and voting rights for at least two years
• Company shareholders must have been office holders (such as a director) or employees for at least two years

If you want to sell all or part of your business then:

• You must be a sole trader or business partner; and
• You must have owned the business for at least two years.

If you qualify, you must claim the Business Asset Disposal Relief by 31 January following the tax year when the disposal or sale occurred. If you close your business, you can only claim BADR if you sell the asset within three years. 

You can claim BADR by:

• Including the details of the assets and their value in your Self Assessment tax return; or
• Completing section A of the Business Asset Disposal Relief helpsheet and including calculations of the relief due. 

How does BADR work in a Members’ Voluntary Liquidation?

There are two ways to close a solvent limited company. You can use a process called Voluntary Dissolution, which is the cheapest method, or put your business into a formal liquidation procedure called Members’ Voluntary Liquidation (MVL). 

On the face of it, an MVL is more expensive, as you have to pay the professional fees of a liquidator. However, it’s also more tax-efficient as you can claim Business Asset Disposal Relief on the distributions.    

The liquidator will value and sell the company’s assets as part of the process and distribute the proceeds among the shareholders. All the proceeds from an MVL are taxed as capital rather than income, and if you qualify for BADR, it will reduce the rate of CGT tax from 18% or 24% to 10%. 

If you were to dissolve the company, only the first £25,000 is taxed as capital. Anything over that amount is regarded as income, which you pay more tax on. You cannot claim BADR if the company is dissolved or struck off.  

How we can help

If you want to close your solvent business and think you might qualify for Business Asset Disposal Relief, we can provide industry-leading advice and guide you through the process. Please get in touch for a free consultation or arrange a meeting at one of our 100+ offices throughout the UK.