Business Assets Disposal Relief (BADR) is a valuable tax relief that can help business owners reduce their tax liability when they dispose of all or part of their business. It is most relevant to those planning their business exit strategy, whether because they are retiring or simply want to do something else. Entrepreneurs may choose to wind up their business and release the capital, sell it to someone else, or pass it on to children (or others) as a gift, but all of these scenarios can result in a significant capital gains tax (CGT) bill. This article will therefore help you understand how you can use BADR to effectively plan future business sales and ensure that you do not have to pay more taxes than necessary.
What is Business Asset Disposal Relief (BADR)?
BADR is a form of capital gains tax relief that can help you reduce the amount of capital gains tax you owe when you dispose of qualifying business assets. It was previously known as Entrepreneurs’ Relief until it was renamed BADR in 2020. There is little difference between the two, but the most important change is the significant reduction in the lifetime limit, which we will explain in more detail in a later section below.
The tax relief was intended to encourage entrepreneurship and thus stimulate the British economy. The idea was that people would be more willing to start their own business and invest in its growth if they didn’t have to worry about paying high taxes when selling. Although there is no substantial evidence to support this claim, the Government statistics on non-structural tax relief (December 2023) estimated the value of the relief claimed for the 2023/24 tax year at £1.5 billion. In our opinion it is still worth claiming while it is still available as the tax relief is significant.
How does BADR work?
BADR allows you to sell qualified business assets at the minimum capital gains tax rate. There are four different tax rates depending on your income tax bracket and the type of asset you are disposing of. Basic rate income taxpayers are required to pay 10% on most assets and 18% on residential property, while higher and additional income taxpayers are required to pay 20% on most assets and 28% on residential property. By claiming BADR, capital gains tax on qualifying business assets is subject to only a 10% tax rate, regardless of your income tax bracket.
What are qualifying business assets for BADR?
First of all, it must be made clear that BADR can only be invoked if there is a significant sale of company assets. This means that the sale of assets must result in a significant restriction or cessation of business operations. A separate sale of business assets is only permitted if the sale is linked to a significant sale. Mere disposal of company assets is not permitted and you will be subject to normal corporation tax rates (or corporation tax if you continue to run the business through a limited company).
This means you can’t simply sell business assets and claim BADR — you must sell the assets as part of closing or passing on your business. For example, you run a factory and decide to sell half of your machines. If the reason for this is because you are replacing it with updated versions, you will be subject to normal CGT where you will make a profit. On the other hand, if you sell half of your machinery because you are reducing your production output to prepare for the closure of your business, this may qualify for relief.
Due to the generous nature of BADR, strict rules apply to the requirements depending on the type of asset to be disposed of:
- All or part of your business interest
“Business interest” applies only to sole proprietors or partnerships, as this refers to the fact that neither business structure is owned by shares and shareholders. You can sell or give away an entire business or just a portion of it and claim BADR as long as you have owned the business for at least two years.
If you only sell part of your company, it must also meet the requirement that the part being sold can continue to be operated independently. For example, you own two bakeries and sell one of them. The one that was disposed of can continue running independently of the other and would therefore qualify. However, if the situation were slightly different and you still own two bakeries, but one is significantly larger and produces the goods that are supplied to both; and you sold the smaller bakery, it is unlikely that BADR can be claimed. The smaller bakery would be dependent on supplies from the larger bakery and would therefore not be able to operate its business independently.
- Assets used in the company
In some situations (usually sole proprietorships), assets used in a business are sold or given away, but only after the business has already ceased trading activities. In this case, the divestitures will still be treated as related divestitures, with the material divestiture constituting the cessation of business, even if they are not simultaneous.
These assets may qualify for BADR provided the business has existed for at least two years prior to termination and the assets are sold within three years from the date of disposition. The assets do not have to be held for two years, but only need to be used for the business at the time of closing.
For example, you have been running a gardening and landscaping business for 10 years but decide to retire. You have a number of assets, including a van, a lawnmower, and other tools and equipment that you may eventually dispose of after a year. If you had sold these assets while still operating your landscaping business, you would not be eligible for BADR. However, in this case, the assets are sold due to the termination of your business and therefore qualify.
- Shares or securities of a limited liability company
Shares or securities in a limited liability company are a type of asset that does not necessarily have to be held by the owner of the company. It can be held by officers of the company (directors) or employees. To qualify, the same two-year waiting period applies, meaning you must have held the shares for at least two years before you can sell them.
In addition, to qualify, the shares (or securities) must be for a “partnership.” A partnership is defined when the shareholder owns at least 5% of both the company’s common stock and voting rights and is either a) entitled to at least 5% of the company’s distributable profits and 5% of the company’s assets to be liquidated, or b) entitled to at least 5% of the proceeds from the sale of the company’s entire share capital.
- EMI shares in a private limited company
If you hold shares in a private limited company under an Enterprise Management Investment (EMI) option, the above rules are relaxed. The two-year waiting period applies from the time you received the stock option and not from the time you purchased the actual shares. Additionally, you are exempt from the 5% share ownership requirement.
Which assets do not qualify for BADR?
The most important rule that applies to all disposals in order to be eligible for tax exemption is that they must come from a company that carries on trade. Assets of investment companies that hold, for example, rental properties or investment portfolios are therefore excluded from this. In the current tax year 2024/25, the exception to this is if a company keeps furnished holiday accommodation (FHL). However, this is set to change from April 2025, when FHLs are set to lose their favorable tax treatments. If your company is involved in an investment activity, divestitures may still be an option as long as the non-trading activity is not material. HMRC considers anything of 20% or more to be significant, which can be measured by business turnover, balance sheet assets and staff.
Who can claim BADR?
Since BADR was previously called Entrepreneurs’ Relief, it was incorrectly assumed that only entrepreneurs were eligible. In fact, it is generally available to most people with a business interest:
- Sole proprietor
- partner in a partnership
- officers of a limited company (directors)
- Employees of a limited liability company
- Trustee
BADR cannot be claimed by limited liability companies. Because they are not subject to capital gains tax, but to corporate income tax. BADR cannot offer corporate tax relief.
How much tax relief can I claim through BADR?
The maximum amount you can receive in tax relief through BADR is £1 million and this is also a lifetime limit. This means you can make as many qualifying disposals as you like, claiming BADR each time, until you exhaust the £1 million tax relief limit.
Previously, when BADR was known as Entrepreneurs’ Relief, the cap was much more generous, allowing a lifetime cap of ₹10,000 crore. However, it is not certain whether the government has plans to abolish BADR entirely. Therefore, we recommend using it while it is still available.
How to claim BADR
Once you have made your disposal, you will need to determine whether you have made a profit and therefore a CGT liability has arisen. While it’s easy to determine where you’ve sold business assets, it’s not always clear where you’re gifting your business. For example, you may decide to pass control to your children when you wish to retire (please note that this scenario may also potentially result in inheritance tax liabilities in certain circumstances). In this case, you may need to make an estimate to determine whether capital gains tax is due.
There are two ways to apply for BADR. The first option will be the more common route. Any type of capital gains debt must be declared on a self-assessment tax return by the 31stst The sale took place in January after the end of the tax year. There will be a dedicated section where you can report your CGT and apply for BADR.
If you cannot make your claim through a personal tax return, you can do so in writing and complete an HS275 claim form. You will need to attach your tax calculations to this form and send it to HMRC.
Get help claiming relief for the disposal of business assets
If you are having difficulty navigating BADR’s complex requirements, we can help you confirm your eligibility. Our comprehensive service will help you accurately calculate your CGT liability and submit a BADR claim on your self-assessment tax return. If you’re not quite there yet but starting to think about exiting the business, why not take a look at our tax planning options? Contact us to discuss your business and tax requirements.
