What is Entrepreneurs' Relief (Business Asset Disposal Relief)?
Business Asset Disposal Relief (formerly Entrepreneurs' Relief) offers a 10% Capital Gains Tax rate when selling your business or shares, up to a £1 million lifetime limit.
Detailed Explanation
Business Asset Disposal Relief (BADR)
What it is
Reduced CGT rate of 10% (vs 20% normal rate) when disposing of qualifying business assets.
Lifetime limit
£1 million of gains
Qualifying disposals
1. **Selling your business** (sole trader/partnership) 2. **Selling shares in a trading company** where you: - Own at least 5% of shares AND voting rights - Are an officer or employee - Have held shares for 2+ years 3. **Company liquidation** (MVL) meeting same criteria 4. **Associated disposal** (e.g., property used by your company)
Example
- Sell company shares for £500,000 - Original cost: £100 - Gain: £499,900 - Tax with BADR: £49,990 (10%) - Tax without BADR: £99,980 (20%) - Saving: £49,990
Conditions for shares
- Personal company (5% shares + votes) - Trading company (or holding company of trading group) - Been officer/employee for 2 years - Held shares for 2 years
What's not covered
- Investment companies - Property investment companies - Company with significant non-trading activities
Claiming
- Claim on Self Assessment tax return - Or in writing to HMRC - Within 2 years of disposal
Planning point
Can use with MVL to extract cash at 10% rather than dividend rates up to 39.35%.
Source: HMRC Business Asset Disposal Relief Guidance
Real-World Examples
Selling Your Consulting Business
Sarah, a sole trader consultant, sells her entire business (assets and goodwill) for £400,000 after operating for 7 years. Because she meets the criteria, she can apply Business Asset Disposal Relief and pay only 10% CGT on the gain instead of the usual higher rate.
Share Sale in a Tech Startup
David owns 10% of a tech company where he also works as the CTO. After 5 years, he sells his shares for £800,000. Since he's held the shares for over 2 years, owns more than 5%, and is an officer, he qualifies for BADR and benefits from the lower 10% CGT rate.
Company Liquidation After Retirement
After 20 years running a successful manufacturing business, John decides to retire and liquidate his company via a Members' Voluntary Liquidation (MVL). As a shareholder who meets the 5% ownership and officer/employee criteria, he can claim BADR on the distributions he receives from the liquidation, up to his remaining lifetime allowance.
Common Mistakes to Avoid
- Forgetting that the 2-year qualifying period requires continuous ownership and officer/employee status right up to the date of disposal.
- Assuming that BADR applies automatically without confirming that the company is a 'trading company' and not primarily engaged in investment activities.
- Failing to consider the impact of BADR on other tax planning strategies, such as pension contributions, which could be more beneficial.
- Not accurately calculating the capital gain and incorrectly applying the £1 million lifetime limit, leading to potential penalties from HMRC.
Frequently Asked Questions
If I sell my business in stages, can I claim BADR on each sale?
Yes, you can claim BADR on multiple disposals as long as each disposal qualifies and you haven't exceeded your £1 million lifetime allowance. Each disposal is assessed separately, and it's crucial to maintain accurate records.
What happens if I've already used some of my Entrepreneurs' Relief allowance before it became Business Asset Disposal Relief?
The £1 million lifetime limit is cumulative, so any Entrepreneurs' Relief claimed previously counts towards it. If you claimed £500,000 under Entrepreneurs' Relief, you'd only have £500,000 remaining for BADR.
If I gift shares to my spouse, and they later sell them, who claims BADR?
If shares are gifted, the recipient (your spouse) would need to meet the BADR qualifying conditions *at the time of the sale* to claim the relief. They must own at least 5% of the shares, have voting rights, and be an officer/employee for at least two years prior to *their* disposal.
How does BADR interact with other capital gains tax reliefs or allowances?
BADR is applied *before* deducting your annual Capital Gains Tax allowance (currently £3,000 for the 2024/25 tax year). The 10% rate applies to the gain after the allowance is deducted, up to the £1 million limit.
Practical Tips
- Start planning well in advance: Ensure you meet all the qualifying conditions for at least two years *before* you plan to sell or liquidate your business; consult with a tax advisor to confirm eligibility.
- Maintain detailed records: Keep meticulous documentation of share ownership, employment history, company activities, and any previous claims for Entrepreneurs' Relief to support your BADR claim.
- Consider staged disposals carefully: If selling in stages, plan the timing of each disposal to optimize your tax position, taking into account the £1 million lifetime allowance and potential changes in tax laws.
- Review your shareholder agreements: Ensure your shareholder agreements accurately reflect share ownership and voting rights, especially if you're approaching a potential sale or liquidation event, as these will be scrutinized by HMRC.
Related Questions
How do I close my limited company?
The cheapest option is voluntary strike-off (£10 fee, assets under £25,000). For larger companies, use Members' Voluntary Liquidation (MVL). Outstanding tax affairs must be settled first.
What is R&D tax relief?
R&D tax relief allows companies to claim extra tax deductions or cash credits for qualifying research and development expenditure. SMEs can claim up to 21.5% of qualifying costs as a cash credit.
What is the Annual Investment Allowance?
The Annual Investment Allowance (AIA) lets businesses claim 100% tax relief on qualifying capital expenditure up to £1 million per year. It covers plant and machinery purchases.
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