What is the Minimum Shareholding Threshold for Business Asset Disposal Relief?

March 1, 2024 / Business Asset Disposal

Business Asset Disposal Relief is an exceedingly useful tool available to shareholders looking to cut down on their tax bill. By using this relief, shareholders who have made profits as a result of selling off company assets can enjoy a considerably lower tax rate on said gains. When used in conjunction with the tax benefits of Members’ Voluntary Liquidation, shareholders can ensure they aren’t overpaying on their taxes.

Given the clear benefit of paying less tax on realised profits, any shareholder of a company that has recently disposed of assets should consider the relief. However, Business Asset Disposal Relief is not available to everyone, and certain eligibility criteria must first be met.

In this article, Clarke Bell discusses the eligibility criteria for Business Asset Disposal Relief, such as the minimum shareholding threshold required, the benefits of the relief, and how you might obtain it.

(Clarke Bell are not tax experts. You should speak to a tax expert about your taxes.) 

What is Business Asset Disposal Relief?

Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, is a form of tax relief that allows shareholders to reduce their Capital Gains Tax bill. It is an option available to certain shareholders of companies, namely those who own above a specific percentage of a company’s shares. As such, business owners and directors are the most common shareholders who utilise BADR.

BADR may be used by certain shareholders upon the disposal of company assets. This includes the sale of company assets, their transferral out of company ownership, or other such actions that would constitute shareholders paying Capital Gains Tax. BADR can then be used to reduce this CGT cost.

How does Business Asset Disposal Relief affect tax?

BADR can be used to reduce the overall cost shareholders incur due to Capital Gains Tax. When assets are disposed of, shareholders may apply for BADR on their Self-Assessment form. If eligible, BADR will result in a reduction of the CGT rates to a mere 10%, up to a lifetime limit of £1 million. Shareholders may utilise BADR across multiple asset disposals and businesses, provided the lifetime limit is not exceeded.

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What are the eligibility criteria for Business Asset Disposal Relief?

Obtaining BADR is relatively straightforward, though it requires shareholders to meet some basic eligibility criteria first. Once eligible, an application can be made as part of your Self-Assessment tax form, rather than requiring a long-winded trudge through various paperwork. The eligibility criteria for BADR are as follows:

  • Your company must trade as its main business activity, and have done so for at least two years prior to your application. Companies that specialise in investments as their main activity are not eligible for BADR.
  • You must either be directly employed by the company in question, or hold office. This must be true for at least two years prior to your application.
  • You must hold at least 5% of the company’s voting rights.
  • You must hold at least 5% of the company’s shares. This is the minimum shareholding threshold for Business Asset Disposal Relief.
  • You must be entitled to at least 5% of the profits raised as a result of the company’s liquidation, or through the company’s sale.
  • If your company has recently stopped trading as its main activity, you may still apply for BADR if you sell your shares within three years of the company doing so.

You may still be eligible for BADR if you meet the above criteria, yet your share ownership has recently fallen below 5% due to share dilution. However, you will need to sell your current shares quickly; waiting until the new shares are issued will make you ineligible.

Does EMI apply to BADR?

EMI, or Enterprise Management Initiative, is a tax-efficient scheme available to a company’s employees. EMI allows employees to purchase shares in a company at a pre-agreed price, completing the transaction later on, once the shares have risen in value and pocketing the difference. EMI shares are eligible for BADR, provided these criteria are met:

  • You must have purchased the EMI shares after 5 April 2013.
  • You must have been employed at the company in question at the time of purchasing the EMI shares.
  • You must have owned the EMI shares for at least two years prior to your BADR application.

How can I obtain Business Asset Disposal Relief?

Obtaining BADR is, thankfully, quite simple. Once you have made a capital gain as a result of asset disposal, you can make note of the gain on your Self-Assessment tax form, then make a request for BADR. Alternatively, you may complete Section A of the Business Asset Disposal Relief helpsheet. In either case, you may only apply for BADR on gains below the lifetime limit of £1 million, and must make the claim no more than two years after the tax year in which the gain was made. For example, a BADR application for gains made in 2022-23 must be submitted no later than 31 January 2025.

Maximising tax efficiency with Members’ Voluntary Liquidation

Business Asset Disposal Relief is commonly used in conjunction with Members’ Voluntary Liquidation (MVL). The MVL procedure is a formal liquidation procedure available to solvent companies, and is commonly used by directors looking to close companies with large reserves of retained profits. This is due to the noteworthy tax benefits afforded by the MVL procedure. Any gains made as a result of the procedure will be subject to CGT, which is both cheaper than Income Tax rates, and allows shareholders to make use of BADR. If you wish to close your solvent company in a tax-efficient manner, an MVL is often the best way.

Let Clarke Bell help

Business Asset Disposal Relief is a valuable tool for company shareholders. It allows for the tax-efficient disposal of assets, resulting in shareholders receiving a smaller tax bill in times of downsizing, liquidation, or other scenarios involving asset disposal. Furthermore, the relief goes hand-in-hand with Members’ Voluntary Liquidation, allowing companies to be closed in a more tax-efficient and cost-effective manner. If you are looking to close your solvent company efficiently, Clarke Bell can be there to help you achieve this goal.

We have more than 29 years of experience in closing companies efficiently, both solvent and insolvent. We can do the same for you.

Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.