Business Asset Disposal Relief (BADR) in the UK

Business Asset Disposal Relief (BADR), previously known as Entrepreneurs' Relief, is one of the most important tax reliefs offered by the United Kingdom to business owners. BADR allows for the reduction of Capital Gains Tax (CGT) to a reduced rate of 10% when you sell your business or other qualifying assets. This relief is highly valuable for those planning to sell their business or a part of it, providing an opportunity to save a significant amount of money.

BADR applies to capital gains of up to £1 million over a lifetime, which means business owners can efficiently plan their sales and taxes when disposing of their assets.

To qualify for BADR, you must meet certain criteria. These include the type of asset, the holding period, and the nature of the activity. These requirements ensure that the relief is applied only to active entrepreneurs who contribute to economic growth.

Qualifying assets include an individual business or a part of it, shares or a portion of shares in a private company where you own at least 5% of the shares and voting rights, as well as commercial property used in qualifying business activities. Your business, shares, or other assets must be held for at least two years before the sale. The business or asset must also actively contribute to commercial activities.

BADR allows the reduction of tax burdens only up to £1 million of capital gains over a lifetime. This limit ensures that the relief is primarily utilized by small and medium-sized business owners. If you accumulate capital gains exceeding £1 million over your lifetime, the excess will be taxed at standard CGT rates.

For example, Maria is a sole trader who has run a device sales business for 10 years. She decides to sell her business for £500,000. The capital gain from the sale is £500,000. Since Maria meets the BADR requirements (she has conducted active commercial activity for over two years), the entire gain is taxed at the 10% rate. Thus, she will pay £50,000 in CGT instead of the standard rate (20% or more).

John owns 10% of the shares in a company he has managed for five years. He decides to sell his shares for £1 million. The capital gain from this transaction is £900,000. Since John is an active shareholder with more than 5% ownership and has held these shares for over two years, his entire capital gain will be taxed at the 10% rate. He will pay £90,000 in CGT instead of £180,000 (applying the standard 20% rate).

Sarah is a small business owner who has been running her business for seven years. She decides to sell a building that she used for her business. The capital gain from this sale is £800,000. Since the building was actively used for her business activities, she meets the BADR requirements. Therefore, her capital gain will be taxed at the 10% rate.

There are some situations where BADR cannot be applied. If the business or asset has been held for less than two years, if the business has ceased to operate as an active commercial entity, if the shareholder does not meet the minimum 5% ownership or voting rights, or if the asset is an investment and is not actively used for commercial purposes.

BADR claims are made through a personal tax return (Self Assessment Tax Return). It is essential to declare the capital gain and include all necessary information about the transaction. The claim must be submitted within 12 months after the end of the tax year in which the asset was sold. If you are unsure about the process, it is advisable to consult a tax professional.

BADR is an excellent way for entrepreneurs to reduce their tax burden when they decide to sell their business or part of it. This relief encourages entrepreneurship, providing business owners the opportunity to save money and reinvest in other activities. Additionally, it promotes long-term business management and growth since short-term transactions do not benefit from this relief.

Business Asset Disposal Relief is a highly significant tax relief for UK entrepreneurs. It allows for a substantial reduction in capital gains tax and fosters economic growth. However, to benefit from this relief properly, it is crucial to understand all the rules and conditions and adhere to the specified deadlines. If you have any doubts about applying for BADR, it is always recommended to consult an experienced tax professional.