Business Asset Disposal Relief is a form of tax relief that allows a company director to sell all or part of their business and pay just 10% in Capital Gains Tax on the profits they have made up to a limit of £1 million. Continue reading to find out more about Business Asset Disposal Relief and whether you could benefit from it.
What is Business Asset Disposal Relief?
Business Asset Disposal Relief (formerly Entrepreneurs Relief) applies Capital Gains Tax at a discounted rate of 10% on profits of up to £1 million if you close down or sell your business. This is significantly lower than the Capital Gains Tax rates you would pay otherwise. Without the tax relief, Capital Gains Tax would apply at a rate of up to 28%.
How does it work?
When disposing of an asset and calculating your gain, you may be able to offset any business losses, or losses in the value of an asset, against the gain to reduce the amount of tax owed. You will only pay tax on the gain if it is above the Capital Gains tax-free allowance, which for the 2021/22 tax year is £12,300. You will also only pay tax on the proportion of the gain that you own. For example, if you own 50% of the business, you will only pay tax on 50% of the gains.
If you add your gain to your annual earnings and the combined amount is greater than the basic rate income tax band, you will pay 20% tax. If the amount is within the basic rate income tax band, you’ll only pay 10% tax. If you can benefit from Business Asset Disposal Relief, this will reduce your tax payable to 10% up the limit of £1 million – significantly reducing the amount of tax you owe.
Business Asset Disposal Relief is only available to individuals, not businesses and does not apply to the sale of residential properties. As it is a lifetime allowance, you do not have to use it up in one single claim, and you can claim the relief more than once up to the limit of £1 million. Any gains that exceed £1 million will be taxed at 20%.
What is the eligibility criteria?
To be eligible for the tax relief, you must be selling all or part of your business, and the following criteria must have applied to you for at least the last two years up to the date you are selling the business:
- You have held 5% or more of the business’s share capital of the company and 5% of the voting share capital.
- You are an employee or office holder of a limited company or the sole trader or business partner of the company.
- You need to have met the qualifying period: this is two years, with the end date being the date of the share disposal.
- You haven’t already exceeded the lifetime cap of £1 million.
Selling the company
If you are selling all or part of your business, the following criteria apply:
- You must have owned the business for at least the last two years.
- You are required to be a business partner or sole trader for the duration of the qualifying period.
If you are selling shares, you must have been an employee or officer, but you do not have to have been the company owner. You must also have held the share capital for the two-year qualifying period.
To claim tax relief on the sale of shares, your company needs to be a trading company. The main activities need to be in trading instead of non-trading activities such as stock or shares, investments or dealing in land or buildings.
If your shares are from an Enterprise Management Incentive (EMI), you must also adhere to extra qualifying conditions to meet the requirements for Business Asset Disposal Relief:
- You must have acquired your shares after the 5th April 2013
- You should have been given the option to buy the shares at least two years before selling them
How to calculate Business Asset Disposal Relief?
You can calculate how much Business Asset Disposal Relief you could be eligible for by following these simple steps:
- Calculate your total taxable gain (what you sold assets/shares for)
- Deduct any losses
- Take away your tax-free Capital Gains Allowance, which is £12,300 for individuals
- If you qualify for Business Asset Disposal Relief, you will only pay 10% tax on the remaining figure
How to claim Business Asset Disposal Relief?
You must contact HMRC to claim for Business Asset Disposal Relief. The most common way to do this is by submitting a claim on your annual self-assessment tax return. You should claim before the first anniversary following the end of the tax year in which the business was sold or the tax disposal took place.
Speak to your Account Manager for more information
If you would like more information about Business Asset Disposal Relief and are a client of Churchill Knight & Associates Ltd, please schedule a call with your Account Manager, who will be happy to discuss this with you.
For more information about our limited company accountancy service or to find out how we can support you and your business, please give our team a call on 01707 871622. Alternatively, please complete the short form on our website and request a call for a time that suits you.
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