A Simple Guide to Business Asset Disposal Relief, also known as Entrepreneurs’ Relief
Business Asset Disposal Relief (BADR), formerly known as Entrepreneur’s Relief, is a useful tool for reducing the tax payable when disposing of a business, or an interest in one. Using Business Asset Disposal Relief, London companies are able to reduce the rate of Capital Gains Tax due on qualifying gains from the highest rate of 20%, to only 10%.
Read on to learn more about what’s involved in Business Asset Disposal Relief, the eligibility criteria, and how to make a claim. Also included is a guide to how a Members’ Voluntary Liquidation is used to liquidate a solvent company, so as to extract the proceeds tax efficiently.
How is Business Asset Disposal Relief used by London Businesses?
Business Asset Disposal Relief (BADR) cuts the rate of Capital Gains Tax due on profits of up to £1 million on the closure or sale of a business. The reduction is significant, reducing the tax liability from the highest rate of 20%, to just 10%.
Until 6 April 2020, Business Asset Disposal Relief was known as Entrepreneurs’ Relief. The change mainly applies to the name, with the concept and eligibility criteria having stayed the same. The one difference is that Entrepreneurs’ Relief was capped at £10 million over an individual’s lifetime, whilst BADR is capped at a considerably lower £1 million.
Why specialist advice is vital when claiming Business Asset Disposal Relief in London
When claiming Business Asset Disposal Relief, London businesses have a great deal of rules with which to comply, and criteria to meet.
It can be possible, however, to make adjustments so that the requirements are met, which is where the specialist expertise comes in. It’s important to also consider how the disposal of other capital assets within the same tax year can affect the BADR claim, as well as the individual’s overall tax liability.
Tax advice is recommended for any business thinking of using an Entrepreneurs’ Relief liquidation process to close a business and reduce the Capital Gains Tax payable. This is so the typical pitfalls can be avoided, and optimal benefits can be gained from the relief. We also recommend London businesses seek this advice independently ahead of appointing Insolvency Online to act as liquidator.
Why should London companies claim Business Asset Disposal Relief?
Regular capital gains attract a tax rate of 10% for Basic Rate Taxpayers, and 20% for Higher Rate Taxpayers, rising to 28% on the sale of residential property.
Most individuals claiming BADR tend to be Higher Rate Taxpayers, particularly if they have drawn considerable dividends during the tax year in which the company is liquidated. For this reason, most directors will enjoy a substantial reduction in their personal tax bills when liquidating their companies and claiming Business Asset Disposal Relief.
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Who can claim Business Asset Disposal Relief?
Whether or not your London company qualifies for Business Asset Disposal Relief depends on what you are actually disposing of.
For example…
If you are closing or selling all or part of your business:
- You must have owned or part-owned it for at least two years
- If the business is closing, you must also sell all your business assets within three years
If you are selling shares or securities:
- The company must be a trading company, with any non-trading activities such as investments forming a maximum of 20% of its income
- If the company switches from trading to non-trading, the shares must be sold within three years of the date the company ceased to trade
- You must have owned at least 5% of the company’s shares and voting rights for at least two years before claiming
- You must be entitled to at least 5% of the profits if the company is to be sold or dissolved
- You must have been an employee or office holder of the company for a minimum of two years
Anyone who works through an umbrella company will not qualify for Business Asset Disposal Relief.
How to claim Business Asset Disposal Relief in London?
You can claim BADR either through your Self-Assessment tax return, or by completing Section 1 of the Business Asset Disposal Relief helpsheet.
You can make any number of applications for BADR, up to a total of £1 million over your lifetime. Over that limit, you will be liable for Capital Gains Tax at the prevailing rates.
When closing a business, you won’t be able to engage in a similar trade or activity for a minimum of two years, otherwise HMRC will treat your profit as an income distribution, rather than a capital gains distribution. This could place you in the additional dividend tax rate.
This rule is to prevent ‘phoenixing’, the process of closing down a business to avoid a tax liability.
Business Asset Disposal Relief and Members’ Voluntary Liquidation (MVL)
In order to benefit from Business Asset Disposal Relief, London companies that have ceased trading must go through a solvent liquidation process. This is known as a Members Voluntary Liquidation (MVL).
MVLs may only be undertaken by a licensed insolvency practitioner, acting as the company’s liquidator. Once appointed, the practitioner prepares all the necessary paperwork, including a statement of affairs. They will also gather the company’s assets, and distribute them amongst the shareholders.
Such distributions are known as ‘chargeable events’ for Capital Gains Tax purposes, and must be listed on the individual shareholder’s Self-Assessment tax return for the appropriate tax year or years.
The liquidator must make sure that capital distributions are made efficiently, and it is also down to them to obtain tax clearance for the company from HMRC. Once this is received, the liquidation will be complete and the company will be dissolved three months after the liquidator ceases to act.
How can Insolvency Online help with Business Asset Disposal Relief in London?
Insolvency Online is a respected firm of corporate recovery specialists and licensed insolvency practitioners.
As the company’s appointed liquidator in a Members Voluntary Liquidation, we manage capital distributions are to shareholders in a timely and efficient manner. Company directors benefit from our streamlined processes and expertise which, in most cases, allow for a significant cash distribution to be made within 24 hours of us being appointed.
We also liaise closely with the company’s accountants from start to finish, making sure all outstanding Corporate Tax returns are submitted by the appropriate deadlines.
Please note that Insolvency Online is not a firm of tax advisers. We therefore recommend that you take tailored advice from your own tax specialists ahead of us acting for you in your MVL.
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As well as acting for solvent companies that wish to dispose of assets in the most tax efficient way possible courtesy of a Members Voluntary Liquidation and Business Asset Disposal Relief, London-based Insolvency Online offers a solution-finding approach to business rescue, personal financial difficulties, financial restructuring and recovery matters. If we can help you in any way, please do not hesitate to get in touch.
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Frequently Asked Questions
How long do I have to claim Business Asset Disposal Relief?
As long as you liquidate your company or sell your shares within three years of it ceasing trading, you can make a claim for Business Asset Disposal Relief. London business owners will also need to meet all the require criteria.
How long does the Entrepreneurs' Relief liquidation process take?
Usually it will take 9-12 months for liquidation to complete.
Do I have to wait for tax clearance from HMRC before I receive any funds?
As most liquidators will make capital distributions ahead of obtaining tax clearance, you won’t usually have to wait. The shareholders will have to provide the liquidator with an indemnity as protection should funds need to be returned to the company, for example where Corporation Tax has been underestimated or where previously unaccounted for creditors come to light.
If I claim Entrepreneurs’ Relief, is it still possible to claim my Annual Capital Gains Tax allowance?
Yes, the tax-free allowance can be claimed against any gains made in a particular tax year.
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If you are seeking to liquidate a company using a Members Voluntary Liquidation so that you can claim Business Asset Disposal Relief, London-based Insolvency Online can help. To learn more about our service and how we can act as your company’s official liquidator, please get in touch.
