There are many, various reasons why people start up their own businesses – you may have a genius idea that you think could really take off, you might want a better work-life balance, or for some a favourite hobby becomes an excellent income stream. However, owning a business comes with many potential struggles and one that comes towards the end of a business owner’s career (or potentially earlier if the business is to be acquired due to its high success) is how to exit in the most profitable way.
The sale of a business is subject to Capital Gains Tax, which is charged at a rate of 20% (assuming that you have already used your basic rate band). However, you may be able to reduce your Capital Gains Tax liability by claiming Business Asset Disposal Relief (BADR), formerly called Entrepreneur’s Relief. This allows you to pay Capital Gains Tax at a reduced rate of 10%, rather than 20%, on any gains made on the sale of your business*. However, there are a few conditions which must be met in order for you to be able to qualify.
How to know if BADR might apply to your Business
BADR may be applicable to you if the following apply:
• You are selling all or part of a business (this may include shares in a business, or assets of a business which has now ceased)
• You have owned the business, assets or shares for at least two years prior to the date you sell the business
• Where the business ceased prior to its sale, the sale must take place within three years of its cessation
• If you are selling shares in a company, you must be an officer or employee of the company or of at least one company in a group of companies
• You must own at least 5% of the ordinary share capital of the company.
As with all reliefs, there is a limit to how much BADR can be claimed. This comes in the form of a lifetime limit, which is currently £1,000,000 for disposals made after 11th March 2020. This means that if you have claimed BADR for a gain of £500,000 previously, the reduced capital gains tax rate will only be available on £500,000 of future gains.
BADR may also be available on shares acquired via the Enterprise Management Incentive (EMI) Scheme.
How can we help?
Not looking for an exit strategy just yet? Even if an exit strategy isn’t quite on the horizon, it is always a good idea to understand the conditions that must be met to ensure that you will qualify for the relief in the future. As with all taxes, planning is key in allowing you to efficiently reduce your tax liability. Whilst we have done our best to summarise the advantages of BADR and the conditions that must be met in order to claim it, there are many aspects and intricacies to consider. Therefore, we would love the opportunity to understand more about your specific circumstances so that we can advise you further.
*Assumes that gains exceed individual’s basic rate band and annual exempt amount and that any losses have been offset effectively.