Complete Guide to Business Asset Disposal Relief

December 14, 2020 / Business Asset Disposal

Business Asset Disposal Relief (known as Entrepreneurs’ Relief until 6 April 2020) is a form of tax relief that can save directors and shareholders who are selling or closing their solvent company a small fortune on their tax bill.

The government introduced Business Asset Disposal Relief to encourage entrepreneurs to set up a business, build it up and reward them for their hard work once they were ready to sell.

To find out more about Business Asset Disposal Relief, including how it works and who is eligible, Clarke Bell have put together this guide outlining everything you need to know about the legislation formerly known as Entrepreneurs’ Relief. Ready to see how much you can save?

What is Business Asset Disposal Relief?

Business Asset Disposal Relief is a form of tax relief that allows a company director to sell all or part of their business and pay just 10% in Capital Gains Tax on the profits they have made over the lifespan of the business up to a limit of £1 million.

This is significantly lower than the level of Income Tax they would otherwise be charged, which stands at 18% at the basic level and 28% at the higher level.

Has Entrepreneurs’ Relief been scrapped?

In March 2020 Chancellor Rishi Sunak announced that there would be changes to Entrepreneurs’ Relief. However, it was not scrapped. Instead, changes were made and it was renamed to Business Asset Disposal Relief.

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The main change was to the lifetime cumulative allowance which meant that the previous £10 million lifetime gains were cut down to £1 million lifetime gains.

So, although Entrepreneurs’ Relief was not removed altogether, it was changed significantly.

Who qualifies for Business Asset Disposal Relief?

To be eligible for Business Asset Disposal Relief, you must be selling all or part of your business and the following criteria must have applied to you for at least the last 2 years up to the date you are selling the business:

  • You must be a sole trader, business partner or employee of the company.
  • You must have held 5% of more of the share capital of the company and 5% of voting share capital. This minimum of 5% must have been in pace for at least 12 months prior to claiming.
  • You must have owned the business for at least 2 years.

There are also key differences depending on whether you are selling shares or are disposing of your company altogether. Although in both instances you will qualify for Business Asset Disposal Relief, it is important to distinguish between the two.

Selling the company

If you are selling all or part of your business:

  • You need to be the sole trader or business partner for the duration of the qualifying period (2 years)
  • You should have owned the business for at least 2 years

This is beneficial for directors that want to close their company through a Members’ Voluntary Liquidation as it allows them to do so in a tax efficient way.

Selling shares

If you are selling shares you are not required to be the company owner, but you must have been an employee or officer in the company. Similarly, you should have held the share capital for the qualifying period of 2 years.

Furthermore, to claim on disposal of shares, your company needs to be a trading company that has traded within the last 2 years. This means that the company’s main activities need to be in trading as opposed to non-trading activities like investment.

If your shares are from an Enterprise Management Incentive (EMI), they must comply to extra qualifying conditions in order to meet the requirements for an Entrepreneurs’ Relief claim.

If shares are from an EMI, you must have:

  • Acquired them after 5th April 2013
  • Have been given the option to buy them at least 2 years before selling them

How does Business Asset Disposal Relief work?

As we have already mentioned, when a director or shareholder sells or closes their business, they must pay Capital Gains Tax on any profits made.

Business Asset Disposal Relief relieves you of some of this tax which can save directors a small fortune.

Capital Gains Tax is applied to your overall profits over your tax-free allowance of £12,000. Capital Gains Tax is applied at a rate of 20% to anything over this.

However, by claiming Business Asset Disposal Relief, entrepreneurs can reduce the amount of Capital Gains Tax to just 10%, resulting in huge savings.

How to calculate Business Asset Disposal Relief

To calculate how much you will be eligible to save through Business Asset Disposal Relief, you can simply:

  • Calculate your total taxable gain. Do this by adding together all your capital gains, taking away your losses
  • Take away your tax-free capital gains allowance, this is £12,000 for individuals
  • You will be left with a figure which you can deduct 10% off which you will pay in tax

How can I claim Business Asset Disposal Relief?

You must contact HMRC in order to claim for Business Asset Disposal Relief. Usually, a claim is done on your annual self-assessment tax return.

Your claim for Business Asset Disposal Relief must be done at least 12 months from the 31st January following the tax year your business was sold.

Let Clarke Bell help you with the next steps

If you have decided to sell or close your business, one of Clarke Bell’s professional tax advisers or accountants can make sure you take full advantage of Business Asset Disposal Relief whilst remaining compliant to your legal tax obligations.

Making use of Business Asset Disposal Relief can save company directors significant amounts on their tax bill, but you need to know how to apply for it and whether you are eligible in order to reap the rewards.

For more help with all things Business Asset Disposal Relief, get in touch with one of our friendly experts today and find out what we can do for you today.