Updated: 4th February 2021
Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief prior to April 2020, is a tax relief scheme which allows for a reduced rate of Capital Gains Tax (CGT) to be paid upon the sale or solvent liquidation of a limited company. Those who qualify for Business Asset Disposal Relief pay just 10% CGT on qualifying gains (rather than the standard rate of 20%), up to a lifetime limit of £1 million.
Originally intended to reward success and encourage entrepreneurs to set up in business, the scheme has become increasingly controversial in recent years with many calling for a rethink on how Business Asset Disposal Relief is handled. Worth an estimated £2.4bn to directors last year, questions are being asked as to whether this is a suitable use of government funds and is often subject to speculation ahead of the annual Budget.
Business Asset Disposal Relief is available to sole traders, company directors, and partners who sell or otherwise dispose of the whole or a part of a trading business. Individuals must have at least a 5% shareholding in the company in order to be able to claim.
In order to have a valid claim for Business Asset Disposal Relief, these above conditions must have been met for at least 24 months leading up to the disposal; the company must also have traded during this time.
Business Asset Disposal Relief can be claimed when the business, or part of it, is sold to another party; the company is placed into a solvent liquidation process; or as part of a restructuring of a company’s shareholding. This scheme can only be used if the company enters a formal liquidation process, or if the company is sold; if the company is dissolved or struck off using a DS01 form, BADR cannot be claimed.
Many owner-managed SMEs find there is simply no one willing or suitable to pass the company on to when the time comes for them to leave the business either due to retirement or a desire to move on. In these instances, directors may choose to place the company into a formal liquidation procedure known as a Members’ Voluntary Liquidation – or MVL.
MVLs are a formal way for solvent companies to formally bring an end to a company which is no longer required while extracting the proceeds in a tax-efficient manner. MVLs are generally suitable for companies with in excess of £25,000 to distribute to shareholders.
As a formal liquidation procedure, MVLs can only be carried out by a licensed insolvency practitioner acting as the company’s liquidator. Once appointed, the insolvency practitioner will prepare all the necessary paperwork including a statement of affairs, gather the company’s assets, and distribute these among shareholders.
Following the disposal of the company and/or your shareholding, you can claim Business Asset Disposal Relief either through your tax return, in writing to HMRC, or by filling in Section A of the Claim for Entrepreneurs’ Relief form (claim form HS275).
A claim for Business Asset Disposal Relief, formerly Entrepreneurs’ Relief, must be submitted to HMRC by the first anniversary of the 31st January following the end of the tax year in which the sale or liquidation of the business occurs.
When it comes to Business Asset Disposal Relief following liquidation, it is the date of the distribution of funds which is important rather than when the MVL process was initiated. The distribution date is what will be declared in your tax return and the legislation on Business Asset Disposal Relief on that date is what will be applied.
If you are considering closing your company and taking advantage of Business Asset Disposal Relief you should take advice from a licensed insolvency practitioner. Begbies Traynor has over 70 licensed insolvency practitioners working across a network of offices throughout the UK. You can arrange a free no-obligation consultation where you can learn more about the options available to you and your company. Call our team today on 0800 063 9221.