How Does Business Asset Disposal Relief Work In a Liquidation?

October 28, 2023 / Business Asset Disposal

When a director of a solvent company is ready to close down their company, they will want to do so in the most tax-efficient and cost-effective way. A Members’ Voluntary Liquidation (MVL) is a very popular method for closing a solvent company. It is approved by HMRC and provides an excellent way to withdraw the company’s assets (often just cash-at-bank) in the best way possible.

The MVL procedure allows for huge tax savings, which can be accentuated by Business Asset Disposal Relief (BADR). Previously known as Entrepreneurs’ Relief, BADR allows directors and other shareholders to dramatically reduce their tax bill, working in conjunction with the benefits afforded by MVL.

Liquidating a company is a complicated affair, due to the rules and regulation surrounding the process. However, your appointed insolvency practitioner will help you through the process.

Reducing your tax bill is also a complicated matter. Your accountant will be able to help you with this, including how you can benefit from BADR.

Clarke Bell are not tax advisors. However, this article provides an overview of Business Asset Disposal Relief, breaking down how it works in an MVL, and how it can save you money.

What is Business Asset Disposal Relief?

Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief, is a tax relief available to shareholders liquidating company assets or shares. Given this purpose, it is predominantly used during voluntary liquidation procedures, such as Members’ Voluntary Liquidation.

As part of the MVL procedure, directors and shareholders can use BADR to greatly reduce their Capital Gains Tax bill. In concert with the benefits afforded by the MVL procedure, this tax bill can be reduced to as little as 10%.

This advantage makes BADR a favourite amongst shareholders during MVLs.

Members’ Voluntary Liquidation

To maximise the potential of BADR, it is best used as a part of a Member’s Voluntary Liquidation. This procedure is available to directors of solvent companies – i.e. companies which are capable of repaying debts as they come due. If you decide to close your company via an MVL, you must swear a Declaration of Solvency before a solicitor in order to qualify.

Once eligible, directors may appoint an insolvency practitioner to handle the company’s liquidation. This insolvency practitioner will take charge of the company, identifying any assets for liquidation and ensuring the company is wound up efficiently. Directors do retain some control at this stage, and are able to specify whether certain assets are transferred or distributed in specie, rather than sold off. Once all assets have been disposed of or distributed in specie, the proceeds will be distributed to shareholders, and the company will be closed. It will be removed from the Companies House register and ceases to exist as a legal entity.

Tax benefits of an MVL

One of the main reasons to use an MVL is the outstanding tax benefits the procedure provides. When disposing of assets as part of the procedure, profits will be taxed according to Capital Gains Tax rates. This is quite the advantage compared to other methods of closing a solvent company, as gains made using other procedures are taxed under Income Tax rates.

While Capital Gains Tax rates are a key contributor to tax savings using an MVL, the main draw is BADR. If eligible, directors may apply for BADR towards the end of their MVL procedure, and may benefit from an enormous tax reduction on their realised profits.

How does BADR work in an MVL?

BADR can be used at the tail-end of an MVL procedure to improve shareholder tax savings further. Applications can be made through a Self-Assessment tax form, though your accountant will be happy to provide assistance for you, if needed.

If you are eligible for BADR during the liquidation of your company, you may have it applied to all of your realised profits under the lifetime limit of £1 million. BADR is quite far-reaching, and can apply to any proceeds raised during the liquidation of your company, from company assets to shares. Once applied, BADR can see your Capital Gains Tax bill reduced to a mere 10% of your overall profits.

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Who can apply for BADR?

Anyone selling a portion of a company undergoing liquidation may benefit from BADR, provided they meet certain basic eligibility criteria. These criteria require individuals to have been an owner, shareholder, or business partner of the business undergoing liquidation for at least two years. Shareholders must also have at least 5% ownership of the company undergoing liquidation to qualify.

If you decide to apply for BADR, it must be done within three years of liquidation for the relief to take effect.

How does BADR apply to selling company assets?

The sale of company assets may benefit from BADR in most cases. Any claims must be made during the “qualifying period” or the two-year time window after the sale of an asset. Provided you claim BADR within this period, it can apply to a wide range of assets. The most common category is company-owned assets disposed of by the liquidator. Such assets include anything from company equipment to office furniture, and even includes company-owned land or other properties. Any proceeds raised from the sale of such assets may have the relief applied, assuming the beneficiary meets the aforementioned criteria.

Assets loaned to the company that are sold as part of the liquidation may also have BADR applied. Such assets must be owned by the shareholder in question, however, and cannot include assets leased to the company by third parties. For example, a piece of machinery owned by a shareholder’s other company could be loaned to the liquidating company to fulfil a particular role. Should the shareholder decide to sell this asset, and at least 5% of their ownership in the company, they may qualify for BADR.

Lastly, shareholders selling personal assets used as part of business operations may also benefit from BADR. Such assets fall under the direct ownership of the shareholder, but were used in a business capacity or otherwise used to fulfil a task required by the company. For example, a personal computer used for work purposes may benefit from BADR.

Any assets that fall under these three broad categories can have BADR applied, provided it is claimed within three years of the company’s liquidation. Claims can be made as part of a liquidation procedure, or through a Self-Assessment tax form.

How does BADR apply to selling company-owned properties?

It is possible to sell company-owned property and benefit from Business Asset Disposal Relief. Proceeds raised from selling land, office space, warehouses, and other such properties may qualify for BADR. A common example is the sale of farmland used in a farming business, or the sale of warehouses used to store stock. Regardless of the property type, beneficiaries of the proceeds must first meet a set of eligibility criteria.

In order to qualify for BADR when selling company-owned properties, you must have held at least 5% of the company’s shares and be entitled to at least 5% of the company’s disposal proceeds. You must also have held your position in the company for at least two years, and submit your claim for BADR within three years of the company’s liquidation or sale.

How does BADR apply to selling shares?

In addition to company assets, proceeds raised through the sale of shares may benefit from BADR. In order to qualify for the relief, shareholders must have occupied either an employee role or an office, such as director, in the company for at least two years. Shareholders must also claim BADR within three years of the company’s liquidation. Anything past this timeframe will not be eligible for the relief. Lastly, the company undergoing liquidation must have been mainly active in trade, not investments.

In addition to this set of eligibility criteria, shareholders must own at least 5% of the voting rights in the company, and be entitled to at least 5% of the disposal proceeds. Shareholders below this threshold will not qualify for BADR. However, there is an exception to this rule. Shareholders that fall below the 5% threshold due to the creation of additional shares may be able to apply for BADR.

Additional eligibility criteria will apply if you obtained your shares through an Enterprise Management Incentive scheme (EMI). Shareholders must have purchased their shares after 5 April 2013, and they must have held the shares for at least two years before selling them. If these two criteria are met, along with the aforementioned criteria, then shareholders can apply for BADR.

The lifetime limit in BADR

Although Business Asset Disposal Relief can be used to greatly reduce the tax applied to profits, it cannot be used indefinitely. There is a limit on the amount of profits BADR can apply to, with that limit covering the entire business career of an individual.

Prior to 11 March 2020, the lifetime limit was £10 million. However, the lifetime limit is now £1 million.

If you have already claimed £1 million or more in BADR or Entrepreneurs’ Relief before the limit change, you will not be able to make any further claims. However, if you have claimed less than £1 million, you will still be able to claim the difference. Note that there is no limit on the number of BADR claims you can make, assuming you remain below the £1 million threshold.

Deadlines for claiming BADR

In order to qualify for Business Asset Disposal Relief, you must submit your claim within a particular deadline. This deadline depends on when you liquidated or sold your company. For a BADR claim to be eligible, you must ensure that your claim is made within three tax years of liquidation or sale. Anything outside of this timeframe cannot be recorded on your Self-Assessment tax form, and will not be eligible for BADR.

How you can claim BADR

There are two methods by which shareholders can claim Business Asset Disposal Relief.

Firstly, shareholders may make a claim in their Self-Assessment tax form. This requires shareholders to make a note of the assets disposed, the value of said assets, and other such details. If successful, shareholders will receive a tax relief on the specified profits, provided all noted disposals do not total more than the lifetime limit of £1 million. If you close your company via Members’ Voluntary Liquidation, your insolvency practitioner may be able to help you with this application. Note that BADR must be claimed via Self-Assessment no later than the following tax year. If you fall outside this timeframe, you must submit a claim via the second method.

The second method is to make a claim via the Business Asset Disposal Relief form. This may be done after the deadline for claiming via Self-Assessment has elapsed, but still within the three-year deadline. Claiming via the BADR form requires information regarding your company, sold assets, profits, and other such details. If approved, BADR may be applied to profits below the £1 million threshold.

Calculating BADR

Using Business Asset Disposal Relief can help you greatly reduce your tax bill on large profits. That said, exactly how much can you expect to save? To give you an idea of your savings, and whether you should go through the trouble of applying, follow these steps to calculate Business Asset Disposal Relief:

  • The first step is to identify the amount of money subject to tax. This value can be calculated by totalling all of your profits gained through the sale of company assets and shares.
  • After obtaining a taxable value, you need to deduct losses. This can include any financial losses on stock purchases, for example.
  • With a net profit figure in hand, the next step is to make any other applicable deductions. The yearly tax-free personal allowance, standing at £12,570, is one such example.
  • Following the previous three steps will leave you with a taxable figure. Deduct 10% from this value, which you will pay in Capital Gains Tax, and the remnant will be your take-home profit.

Let Clarke Bell help

Business Asset Disposal Relief can result in excellent savings on a shareholder’s tax bill. The relief applies to the sale of a wide array of assets, ranging from machinery to furniture, and also including shares and assets not expressly owned by a company, but still used for company purposes.

For directors looking to place their companies into Members’ Voluntary Liquidation, BADR is one of the best supporting tools available to make the most of the procedure. Your accountant will be able to advise you on how BADR and other tax matters apply to your particular situation.

If you are considering an MVL for your company, Clarke Bell can help you.

We have more than 29 years of experience in helping directors to liquidate their solvent companies through the most efficient means possible. We can do the same for you.

Contact us today for your free advice.