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What is the Business Asset Disposal Relief (Entrepreneur’s Relief)?

What is it?

There are many reasons why an Entrepreneur may wish to sell or give away their business, and when this happens, the entrepreneur may be able to gain a benefit of a reduced tax rate, this benefit in particular is called The Business Asset Disposal Relief (previously known as the Entrepreneur’s Relief before April 2020).

The Business Asset Disposal Relief (BADR) is a tax relief scheme, which helps you maximise your financial gains if you are eligible to claim this when you are selling all or a part of your business.

The financial gain comes from the 10 % reduction of Capital Gains Tax that is paid on the profits you make when you sell any eligible assets (where usually you would be required to pay the standard 20% rate).

Are you eligible?

Unlike many Government schemes, the BADR is only available to individuals – not companies. These individuals include sole traders, company Directors and Partners, however there is a criteria you must meet in order to be eligible for the tax relief.

This scheme can only be applied if the company (or part of it) is being sold or if the company enters a formal liquidation process. The BADR scheme cannot be claimed if the company has been dissolved or struck off using a DS01 form.

To begin, you need to meet the criteria below during the ‘qualifying period’, this period is 24 months leading up to the disposal – the company also must have been trading during this time;

  • You haven’t exceeded your £1m lifetime limit
  • You have been a sole trader, officer or employee of the business
  • You have held 5% or more of the share capital of the business and also 5% of voting share capital.

All of this criteria must be met for the duration of this 2 year qualification period.

However, whilst the above is the general criteria, there are some differences that should be noted.

Selling the business – If the business is being sold as a whole or in parts, you must be the exclusive business owner or a business partner during the 2 year qualifying period, as well as also having owned the business for a minimum of two years.

Selling shares – If business shares are being sold, you needn’t be the business owner or business partner, however you must have been an employee or officer within the business during the 2 year qualifying period. You also must have held the share capital stated above. As well as this, to be able to claim the BADR on the disposal of shares, the company must be a trading company or a holding company of a trading group.

How to calculate BADR

Follow these steps to calculate the Business Asset Disposal Relief;

  1. Work out your total taxable gain by adding together all of your capital gains, less any losses.
  2. Take away your tax-free Capital Gains Allowance (£12,000)
  3. You will now only have to pay 10% on the final figure, the rest goes in your pocket.

How to claim

The BADR claim must be made to HMRC. This is usually submitted as a claim on your annual Self-Assessment tax return.

To avoid making any errors or to check if you qualify, get in touch with one our experts at hello@bkplus.co.uk.

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