How To Calculate Business Asset Disposal Relief

August 13, 2021 / Business Asset Disposal

Business Asset Disposal Relief was known as Entrepreneurs’ Relief until 6th April 2020. It is a type of tax relief which directors can benefit from when they are selling or business or closing down their solvent company with the Members’ Voluntary Liquidation process.

The government introduced the Relief as a way of encouraging business owners to put in the time and work to make their business a success, and then benefiting once they are ready to sell or close down the company.

So, who can take advantage of this relief and how much will you save?

In this guide, Clarke Bell looks at what Business Asset Disposal Relief is and how you can calculate it, to help you find out more about how you can benefit from the measure in 2021.

Business Asset Disposal Relief defined

Business Asset Disposal Relief is a form of tax relief that directors selling or closing their companies can take advantage of, allowing you to benefit from a reduced tax rate.

Business Asset Disposal Relief was formerly known as Entrepreneur’s Relief, until it was changed by Chancellor of the Exchequer Rishi Sunak in March 2020. As well as renaming it Business Asset Disposal Relief, the lifetime limit was lowered from £10 million to £1 million.

When it comes to selling a business, if financial gain is made from the sale, Capital Gains Tax must be paid. Capital Gains Tax applies to the overall profits made over the tax-free threshold of £12,750 and is charged at a rate of 20%.

However, Business Asset Disposal Relief lets you apply a lower rate of 10% Capital Gains Tax on the profits you make. This 10% rate is much lower than the level of Capital Gains Tax or Income Tax you would otherwise pay, which is 18% for the basic level and 28% for the higher level. This means that directors can benefit from keeping more profit from the sale of the business.

Directors can claim Business Asset Disposal Relief more than once, as long as they don’t exceed the £1 million limit.

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Who can claim Business Asset Disposal Relief? 

To be eligible to claim Business Asset Disposal Relief, there are a few criteria that you must meet, including:

  • You must not have surpassed the £1 million lifetime limit
  • You have been an employee/office holder of the limited company, a sole trader or a business partner
  • You must have owned the company for at least the last 2 years, this is known as the qualifying period
  • You must hold 5% of the business’s share capital and 5% of the voting share capital and must have had this for at least the last 12 months

Things are slightly different if you are only selling part of your business. The part you are selling must be able to carry on as a growing concern, which means it must be considered viable and sustainable.

This means that if you were to sell part of the business that was loss-making then you wouldn’t qualify for Business Asset Disposal Relief.

Likewise, if you are selling shares rather than assets then the eligibility criteria also differ slightly.

When selling shares:

  • The company must be a trading company, meaning that your main activities are in trading rather than things like investment, and you must have traded within the qualifying period of 2 years.
  • If the shares you are selling are from an Enterprise Management Incentive (EMI) then they have to comply with additional conditions. For example, they must have been acquired after 5th April 2013 and you must have had the option to purchase them 2 years before you sell them.

How to calculate Business Asset Disposal Relief

Now you know what Business Asset Disposal Relief is and how it works, you will want to know how much you will be eligible to save by claiming it.

To calculate Business Asset Disposal Relief, you can follow these steps:

  1. Firstly, you will need to work out your total taxable gain. You can do this by adding all your capital gains together (this is what you sold your shares or assets for)
  2. Next, you will need to deduct losses from this figure
  3. Now you will need to take away your tax-free allowance, which currently stands at £12,750 (provided you haven’t used it already in the current tax year).
  4. Now, you will be left with a number
  5. Take 10% off this which is what you will pay in tax

How can I claim Business Asset Disposal Relief?

If you’d like to benefit from claiming Business Asset Disposal Relief, you will need to make your claim through HMRC.

Usually, this is done when you submit your self-assessment tax return. However, it is worth bearing in mind that your claim needs to be made before the 1st anniversary of the 31st January following the tax year that your business was sold.

Clarke Bell are here to help

The rules on Business Asset Disposal Relief can be complex and difficult to understand, that’s why it is always a good idea to get expert advice.

Clarke Bell are not tax experts. We would always recommend that you speak to your accountant / tax advisor with regards to whether you are eligible for Business Asset Disposal Relief and how much it is likely to benefit you. (If you don’t have an accountant or tax advisor, we can introduce you to one.)

We help directors to close down their solvent company using the Members’ Voluntary Liquidation (MVL) process. In this process most of the directors we work with are able to claim Business Asset Disposal Relief.

Get in touch today and let’s see how we can help you.

Please note: We hope you found this guide informative. Although we are licensed Insolvency Practitioners, Clarke Bell are not tax experts and as such we would always recommend that you speak to your accountant or tax advisor prior to making any tax-related decisions.