What is Entrepreneurs Relief? BADR tax relief guide
Entrepreneurs relief is a tax relief that reduces capital gains tax payable on the sale of part or all of a business or its assets.
The entrepreneurs relief is charged at 10% which is considerably lower than the potential CGT rates of 18%, 20% or 28%.
From April 2020 HMRC changed the name of entrepreneurs relief to business asset disposal relief or (BADR).
The ability to substantially reduce CGT by using the business asset disposal relief makes it a valuable tool to eligible business owners.
What qualifies for Entrepreneurs Relief?
Business asset disposal relief applies a 10% CGT tax charge on all qualifying assets.
Working out what assets qualify in your circumstances is important to ensure entrepreneurs relief is claimed correctly.
Both company shares and business assets are covered by entrepreneurs relief which means sole traders, partnerships and company directors are all eligible.
Selling part or all of a business
Selling a part or all of your business is available for entrepreneurs relief if you are a sole trader or a business partner.
To qualify you must have owned the business for at least two years up to the date you sell the business.
Closing your business
Closing your business qualifies for business asset disposal relief with the same conditions as selling but you must also dispose of any business assets within a three year period.
Company shares
Company directors of a trading company or the holding company of a trading group can make use of entrepreneurs relief when selling company shares and assets used in the business.
Qualifying criteria requires the company to be trading for a minimum of two years and for the company employee or office holder selling the shares to be part of the company for the same minimum time period.
You can still qualify if your trading company ceased trading if you sell your share within a three year timescale.
The individual selling the shares must have:
- 5% of the voting rights and shares.
- be entitled to at least 5% of available profits and assets on winding up the company.
- be entitled to at least 5% of disposal proceeds if the company is sold.
In situations where share ownership is below 5% business asset relief can still be claimed if you elect to be treated as if you have sold and repurchased your shares directly before the new shares were published.
Assets loaned to the business that are being sold
Assets being sold that you have loaned to the business can qualify for business asset disposal relief.
To be eligible you must have sold at least 5% of your business and allowed your business to use the asset for at least one year up to the date you sold your shares or business or closed the business.
What is the Entrepreneurs Relief worth?
Entrepreneurs relief gives you a 10% CGT tax rate up to the first one million pounds in qualifying capital gains.
The £1 million BADR limit covers all sales and isn’t applicable on an individual basis if you make more than one sale.
BADR is a lifetime allowance so once you hit the £1 million ceiling you’ll need to pay the standard CGT rates on all qualifying gains thereafter.
What are the CGT Rates?
The capital gains tax rates gradually increase based on the level of gain. It’s good to know what rate or rates of CGT you will pay in comparison to the relief offered by BADR.
Everyone is given a capital gains tax allowance which means you can earn up to that allowance without paying CGT.
For basic rate taxpayers you will charged at either 10% or 18% depending on the type of asset being disposed of.
If you are a higher or additional rate taxpayer you will pay 20% or 28% on your chargeable assets depending on the type of asset disposed.
How do I claim Entrepreneurs Relief?
Entrepreneurs relief needs to be claimed on your self assessment tax return or by completing section A of the HS275 business asset disposal helpsheet which you can download from .GOV.
Is there a deadline to claim Entrepreneurs Relief?
It is important to note that Entrepreneurs’ Relief will not be automatically given and must be actively claimed back from HMRC.
To claim this relief, you must do so on or before the first anniversary of January 31 following the tax year in which the qualifying business disposal was made.
As an example if the disposal occurred in the 2022-23 tax year the deadline for claiming the relief is January 31 2024.
Although the claim is typically made on the tax return a separate claim may also be necessary in some cases.
BADR and Capital Gains Tax Advice
In case you plan to sell a personal asset or any part of your business an accountant can guide you on tax planning options that can help you reduce potential tax liabilities.
It’s important to note that our BADR guide is for informational purposes only and is based on legislation and practice at the time of publication.
Taxpayers’ individual circumstances may vary and it is recommended to seek professional BADR advice to determine eligibility and ensure HMRC receives an accurate entrepreneurs’ relief claim.
