What Is Business Asset Disposal Relief?

Business Asset Disposal Relief (BADR) – previously known as Entrepreneurs Relief – is a type of tax relief that can be applied to Capital Gains Tax. It is available to those selling all or part of their trading business.

While Capital Gains Tax is already an attractive alternative to standard Income Tax, BADR elevates its incentives even further.

BADR is often sought by those pursuing a Members’ Voluntary Liquidation (MVL).

How Does Business Asset Disposal Relief Work?

Business Asset Disposal Relief functions by halving the rate of Capital Gains Tax from 24% down to 18%.

Capital Gains Tax is only applicable to the profit you make on the sale of an asset, not the entire amount received. For example, if you bought an asset for £10,000 and then sold it for £15,000, only the £5,000 profit would be taxed.

This allows for huge savings. Applying BADR allows those returns to become even greater.

You can claim up to £1 million in BADR in your lifetime. Any amounts earned over this cap will no longer qualify and will instead be subjected to the prevailing Capital Gains Tax rates. The cap was formerly £10 million, but this was amended in the 2020 Budget.

Who Can Qualify for Business Asset Disposal Relief?

There are a variety of factors that determine whether you’re eligible for Business Asset Disposal Relief. To qualify, you must be either a:

Sole trader
Company director
Partner
Trustee
Employee

Shareholders not directly employed by the company are unable to qualify for BADR. You must have been working within the company for at least the past 2 years. Additionally, you must have held at least 5% in both shareholdings and voting rights for the past two years.

What Is a Members' Voluntary Liquidation?

A Members’ Voluntary Liquidation is a formal procedure which allows solvent companies to return their net assets back to shareholders. It is generally seen as the most beneficial route for solvent companies to take when pursuing closure. This is thanks to the tax benefits it offers.

Shareholder earnings realised through an MVL are subject to Capital Gains Tax rather than regular Income Tax. In addition, eligible parties are able to pursue BADR, making the process even more advantageous.

These benefits are unavailable to businesses who opt to close their businesses independently. They are only available to those pursuing an MVL, a process which must be overseen by a licenced insolvency practitioner.

How Does a Business Qualify for an Members’ Voluntary Liquidation?

To qualify for an Members’ Voluntary Liquidation, a business must be able to pay off all debts and interest on its balance sheet within the next 12 months. This just means that your business must be solvent at the time of application; if for any reason you cannot later pay these liabilities, the liquidation will simply be converted into a CVL.

You will also need shareholders representing at least 75% of the company’s value to back the move. If one shareholder representing 80% of the company votes in favour but four others vote against it, the motion will still go ahead.

How Do I Apply for Business Asset Disposal Relief?

You have to apply for Business Asset Disposal Relief yourself; it will not be granted automatically. You can do this through the completion of your self-assessment tax return.

This must be returned before midnight on the 31st Janaury of the following tax year.

Speak to an Expert Today

If you’re looking to liquidate your solvent company, speak to an insolvency practitioner.

Our expert team can lead you through the process, ensuring you get the biggest returns possible from the realisation of your assets.

Get in touch to arrange a free consultation; find out if you’re eligible today.