Understanding Business Asset Disposal Relief (BADR) in Company Sales

18 Feb 2024

Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief before April 2020, represents a significant aspect of tax planning for individuals selling their businesses in the UK. This relief aims to encourage entrepreneurship by reducing the capital gains tax (CGT) on disposals of certain business assets, making it an essential consideration for business owners contemplating a sale.

The Evolution of BADR

Introduced in 2008, this scheme has undergone various changes to align with economic policies and fiscal strategies. Initially designed to support entrepreneurs by offering a lower CGT rate on the sale of business assets, its criteria and limits have been adjusted over the years to refine eligibility and impact. The change from Entrepreneurs’ Relief to Business Asset Disposal Relief in 2020 signalled a shift towards a more inclusive understanding of what constitutes a business disposal, encompassing a wider range of assets and situations.

Eligibility Criteria

To qualify for BADR, sellers must meet specific conditions. These include holding at least 5% of the company’s shares and voting rights for a minimum of two years prior to sale, ensuring the company is a trading company or holding company of a trading group, and being an employee or officer of the company. These criteria aim to ensure that the relief supports genuine business owners and entrepreneurs.

Structuring a Sale for BADR

Ensuring a sale qualifies for BADR requires careful planning. The structure of the sale is crucial; selling shares in the company as opposed to selling the company’s assets directly can often be more beneficial. This distinction is important because BADR applies to the sale of shares, not to the sale of assets and goodwill outside of a share sale context. Consulting with a tax advisor to navigate these complexities is advisable to maximise the benefits of BADR.

Tax Savings Example

Consider a scenario where an individual sells their company shares for a profit of £1 million. With BADR, they would benefit from a reduced CGT rate of 10% on qualifying gains, leading to a tax liability of £100,000. In contrast, selling company assets and goodwill without BADR could see the same profit taxed at the standard CGT rates, potentially up to 20%, doubling the tax bill to £200,000. This example underscores the significant tax savings BADR can offer.

The Future of BADR

The future of BADR is subject to political change, with the Labour Party historically expressing intentions to review and possibly reform tax relief schemes, including BADR. Such changes could involve reducing the scope of the relief or altering eligibility criteria, reflecting broader economic and fiscal policies. Given these potential changes, business owners considering a sale may find it prudent to act while the current relief remains in place.

Timing Considerations

Selling a business is a complex and time-consuming process, typically taking 9-12 months to complete. This timeline is crucial for sellers aiming to take advantage of BADR under current regulations. With the political landscape and tax policies subject to change, beginning the sale process sooner rather than later can help ensure eligibility for BADR under its current form.

Conclusion

Business Asset Disposal Relief offers substantial tax savings for eligible business owners selling their companies. Given its historical evolution and potential future changes, particularly with the possibility of a Labour government, understanding and navigating BADR is more important than ever. Engaging with a tax professional to structure your sale effectively can maximise your benefits under this scheme. As the political and tax landscape evolves, considering the timing of your sale could be a strategic move to secure the best possible outcome under existing relief provisions.

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