Your at-a-Glance Guide to Business Asset Disposal Relief
Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief, is something you definitely need to know about if you’re winding up your limited company. A valuable tool for minimising the tax payable on the disposal of a business or interest in it, BADR can reduce the rate of Capital Gains Tax on qualifying capital gains from the highest rate of 20%, to just 10%.
Naturally, there are conditions to be met, and important considerations to be made if you’re thinking about claiming Entrepreneurs’ Relief. In this comprehensive guide, we’ll explain precisely what’s involved in Business Asset Disposal Relief, who is eligible, how the tax relief works and how to go about claiming it. We’ll also explain how a Members’ Voluntary Liquidation is used to liquidate a solvent company, whilst extracting the proceeds tax efficiently.
What is Business Asset Disposal Relief?
Business Asset Disposal Relief (BADR) reduces the rate of Capital Gains Tax due on profits of up to £1 million when you shut down or sell your business. The reduction is quite considerable, bringing down the tax liability from the highest rate of 20% to just 10%.
Up until 6 April 2020, Business Asset Disposal Relief was known as Entrepreneurs’ Relief. The concept however remains the same, as does the eligibility criteria. The only difference is that Entrepreneurs’ Relief was capped at £10 million over an individual’s lifetime, whereas BADR is capped at a much lower £1 million.
The Government recognises that encouraging people to start businesses and create employment opportunities helps to buoy the economy. This is why it was decided that any tax levied on the disposal of the business should be mitigated in order to reward the years of hard work involved in building the business, as well as the financial risk that people take when they do so.
The history of BADR and Entrepreneurs’ Relief
BADR has been through a few guises. When it was first introduced in 1998, it was known as Business Asset Taper Relief. Later, in 2008, it became Entrepreneurs’ Relief. Over the years, the conditions for claiming the tax relief have been toughened, with the qualifying lifetime limit of capital gains reduced from £10 million to £1 million as of March 2020.
Despite the reduction, BADR continues to prove a valuable tool for business owners who are disposing of a business, or an interest in one.
Why it’s important to seek specialist advice when claiming Business Asset Disposal Relief
There are various rules and regulations to satisfy when claiming Business Asset Disposal Relief. Sometimes it may be the case that a business or its owner does not fit the eligibility criteria.
However, in some cases, changes can be made that will bring them within the requirements. There are also other considerations, including the disposal of other capital assets within the same tax year, which can affect the claim and an individual’s overall tax liability.
This is why it is important to seek specialist, tailored tax advice if you are considering using Entrepreneurs’ Relief to reduce your Capital Gains Tax liability, so that you can avoid the typical pitfalls and ensure you are gaining maximum advantage from the relief. We recommend seeking such advice ahead of appointing Insolvency Online to act as your liquidator and bring your company to cessation so that its assets can be distributed.
Why claim BADR?
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, especially if they have been drawing significant dividends within the tax year that the company is liquidated. This means that most directors will be in line for a considerable reduction in their individual tax bills when liquidating their company and claiming Business Asset Disposal Relief.
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Who can claim Business Asset Disposal Relief?
Eligibility for Business Asset Disposal Relief differs depending on what you are actually disposing of.
If you are closing or selling all or part of your business:
- You must have owned it, or part-owned it, for a minimum of two years
- If the business is to close, 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 making up no more than 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 own at least 5% of the company’s shares and voting rights
- You must have owned the shares for a minimum of 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 at least two years
It is important to exercise care where a business disposal is not a third party sale, but the receipt of a capital distribution following the winding up of the company. It is also worth noting that if you work through an umbrella company, you will not qualify for Business Asset Disposal Relief.
How to claim Business Asset Disposal Relief?
There are two ways to claim Business Asset Disposal Relief:
- Through your Self-Assessment tax return
- By completing Section 1 of the Business Asset Disposal Relief helpsheet
The online tax return must be submitted by midnight on 31 January in the year following the tax year in question.
There is no limit to the number of applications you can make for BADR, and you may claim up to a total of £1 million over your lifetime. Once you reach that limit, you will need to pay Capital Gains Tax at the prevailing rates.
If you are closing your business, you will not be permitted to be involved in a similar trade or activity for at least two years. If you do, then HMRC will treat your profit as an income distribution, rather than a capital gains distribution, which 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)
For a company to benefit from Business Asset Disposal Relief when it has ceased trading, it needs to go through a solvent liquidation process. This is known as a Members Voluntary Liquidation (MVL).
An MVL is a formal process by which solvent companies can formally cease to be, whilst extracting the proceeds tax-efficiently.
MVLs may only be carried out by a licensed insolvency practitioner, who acts 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. It may be that capital distributions fall across more than one tax year.
The liquidator has responsibility for ensuring capital distributions are made in a timely manner, and for obtaining tax clearance for the company from HMRC. When 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?
Insolvency Online is a trusted firm of corporate recovery specialists and licensed insolvency practitioners.
When guiding business owners through a Members Voluntary Liquidation, as the company’s appointed liquidator, we take charge of ensuring that capital distributions are made to shareholders in a timely and efficient manner.
Thanks to our streamlined processes and in-depth expertise, in most cases, a significant cash distribution is made to members within 24 hours of us being appointed.
We also liaise closely with the company’s accountants throughout the process, ensuring all outstanding Corporate Tax returns are submitted by the appropriate deadlines.
It is important to point out that Insolvency Online is not a firm of tax advisers. As such, we 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, Insolvency Online offers 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 trading, and you meet all the other required criteria, you can make a claim for Business Assets Disposal Relief.
How long does the 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?
No, many liquidators will make capital distributions ahead of obtaining tax clearance. The shareholders will have to provide the liquidator with an indemnity to provide protection in the event of funds having 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 looking to liquidate a company using a Members Voluntary Liquidation so that you can claim Business Asset Disposal Relief, 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.
