An At-a-Glance Guide to Business Asset Disposal Relief (Entrepreneurs’ Relief)
Business Asset Disposal Relief (BADR), previously called Entrepreneurs’ Relief, is a handy way to minimise the tax payable when a business is closed down, or when disposing of an interest in a business.
With Business Asset Disposal Relief, Surrey companies can bring down the rate of Capital Gains Tax payable on qualifying gains, from the top rate of 20%, to just 10%.
In this guide, you’ll discover what’s involved in Business Asset Disposal Relief, what the eligibility criteria are, and how to make a claim. We’ll also cover the subject of Members’ Voluntary Liquidation (MVL), which is the process used to liquidate a solvent company so that the proceeds can be extracted tax efficiently.
How can Surrey businesses best use Business Asset Disposal Relief?
Business Asset Disposal Relief (BADR) reduces the Capital Gains Tax rate due on profits of up to £1 million on the winding down or sale of a business. The reduction is considerable, as it brings the tax liability down from the highest rate of 20%, to just 10%, meaning that directors get to keep more of the proceeds.
Up until 6 April 2020, Business Asset Disposal Relief was known as Entrepreneur’s Relief. Surrey businesses will not find much different since the change, as the eligibility criteria stayed the same. The main difference was that Entrepreneurs’ Relief was capped at £10 million over an individual’s lifetime, but BADR has a significantly lower cap of £1 million.
Why specialist advice is vital when claiming Business Asset Disposal Relief in Surrey
Tax advice is recommended for any business thinking of using BADR to shut down a business and minimise their Capital Gains Tax liability.
It’s important to consider how the disposal of other assets within the same tax year can impact upon the BADR claim, as well as the individual’s overall tax liability.
We always encourage Surrey businesses looking to claim BADR to seek specialist tax advice before going ahead and appointing us as liquidator.
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Reasons why businesses are claiming Business Asset Disposal Relief Surrey wide
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.
With the majority of BADR claimants being Higher Rate Taxpayers, especially if they’ve drawn large dividends during the year in which the company is being liquidated, the reduction in their personal tax bills is significant.
As long as you have owned or part-owned your company for a minimum of two years, and sell all the business assets within three years if you are closing the business, you will usually qualify for BADR.
If you are selling shares or securities rather than the entire business itself, then the company must 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, then the shares will have to be sold within three years. You’ll also need to have owned a minimum of 5% of the company’s shares and voting rights for at least two years before claiming, and must be entitled to at least 5% of the company’s profits if the company is to be sold or dissolved. Finally, you’ll need to have been an employee or office holder of the company for at least two years.
BADR cannot be claimed by anyone working through an umbrella company.
How to claim Business Asset Disposal Relief in Surrey?
You can claim BADR either through your Self-Assessment tax return, or by completing Section 1 of the Business Asset Disposal Relief helpsheet.
Any number of applications for BADR can be made, up to a total of £1 million over your lifetime. After that point, 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 at least 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.
What is a Members’ Voluntary Liquidation (MVL)?
To benefit from Business Asset Disposal Relief, Surrey companies that have ceased trading must go through a solvent liquidation process known as a Members Voluntary Liquidation (MVL).
MVLs must be carried out 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, as well as gathering the company’s assets, and distributing them amongst the shareholders.
The 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 is responsible for ensuring that capital distributions are made efficiently, and they must also 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 Entrepreneurs’ Relief in Surrey?
Insolvency Online is a well-known firm of corporate recovery specialists and licensed insolvency practitioners.
As the company’s appointed liquidator in a Members Voluntary Liquidation, we manage capital distributions 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 throughout, ensuring all outstanding Corporate Tax returns are submitted by the set deadlines.
It is important to note that Insolvency Online is not a firm of tax advisers. We therefore recommend that you take independent advice from your own tax specialists ahead of us acting for you in your MVL.
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Apart from 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, Surrey-serving Insolvency Online provides a solution-finding approach to business rescue, personal financial difficulties, financial restructuring and recovery matters. If we can assist 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?
Providing you liquidate your company or sell your shares within three years of it ceasing to trade, you can make a claim for Business Asset Disposal Relief. Surrey business owners will also need to meet all the necessary 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 must provide the liquidator with an indemnity as protection in case funds need to be returned to the company, for example where Corporation Tax has been underestimated or where previously unaccounted for creditors are identified.
If I claim Entrepreneurs’ Relief, is it still possible to claim my Annual Capital Gains Tax allowance?
Yes, you may claim the tax-free allowance against any gains made in a specific tax year.
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If you wish to liquidate a company using a Members Voluntary Liquidation so that you can claim Business Asset Disposal Relief, Surrey-serving Insolvency Online is ready to assist. To learn more about our service and how we can act as your company’s official liquidator, please get in touch.
