The retention of Capital Gains Tax (CGT) rates for the 2022/23 tax year will be welcome news to entrepreneurs working to eventually realise capital value from their business. It’s worth remembering that CGT rates started at 30% in the early 80s and during the 90s and 00s were aligned to income tax rates, meaning CGT could have been as high as 45% for some. So it’s no surprise there is a desire for current rates (shown in the table below) to be maintained.

There may of course potentially be wider tax changes that could be introduced as the economy recovers from the pandemic. These consultations may even include recommendations from recent reports on more wholesale reforms to both CGT and Inheritance Tax (IHT).

What is Business Asset Disposal Relief?

Business Asset Disposal Relief was known as Entrepreneurs Relief before 6 April 2020. It allows individuals to pay less Capital Gains Tax (CGT) when they come to sell (dispose of) part or all of their business. The lifetime allowance for Business Asset Disposal Relief was cut significantly from its previous level of £10million to the current level of £1million, for qualifying disposals made on or after 11 March 2020. Special provisions do however apply for disposals entered in to before this date that have not yet been completed.

The March 2021 budget saw no changes to the lesser known Investors’ Relief, which can still enable investors to pay a 10% rate of CGT on gains up to £10million. With the reduced lifetime allowance applicable to Business Asset Disposal Relief, Investors’ Relief may attract increased attention. Watch out for a future article covering Investors’ Relief.

Who can claim Business Asset Disposal Relief?

The relief is aimed at individuals in the following circumstances:-

An individual such as a sole trader or a business partner selling or closing their business.
An individual selling shares or securities in a qualifying company.

What are the qualifying conditions?

For an individual to qualify for this relief, both of the following must apply for at least 2 years up to the date that the business is sold:-

You are a sole trader or business partner.
You have owned the business for at least 2 years.

The same conditions also apply if you are closing your business instead.

For an individual selling shares or securities, both of the following must apply for at least 2 years up to the date that the shares are sold:-

You are an employee or office holder of the company (or one in the same group).
The company’s main activities are in trading (rather than non-trading activities such as investing).

There are also other rules depending on whether or not the shares in question are from an Enterprise Management Incentive (EMI).

In all cases, the business assets in question must be disposed of within 3 years to qualify for the relief.

How is the relief calculated?

There are normally four different rates of CGT all of which are lower than the equivalent standard rates of Income Tax - the rates depend on the Income Tax status of the taxpayer and the type of asset disposed of. The successful application of Business Asset Disposal Relief provides a lower flat rate of CGT of 10% as shown below:-

Business Asset Disposal Relief & Investors’ Relief tax rates

Disposals qualifying for Business Asset Disposal Relief will be charged at the relevant reduced rate of 10% on gains made up to the lifetime allowance of £1million, after the CGT exemption of £12,300 has been applied (where available).

How does the relief apply if you’re married?

Spouses and civil partners are often interlinked in the running and ownership of owner-managed businesses. This offers a number of benefits with regards to tax planning, in particular making the use of two individuals’ entitlement to allowances and entitlement to reliefs which have a limit for each individual. Business Asset Disposal Relief is such a relief, with each individual eligible for a lifetime limit of £1million of capital gains. Where spouses jointly own a business, this therefore enables them to utilise the remainder of both their lifetime limits in respect of any disposal.

Where a business owner has not involved their spouse in the ownership of the business, we advise that they should give consideration to the potential tax efficiencies in doing so.

However, it is important to remember that tax considerations are not the only factor in such a decision. The ownership of a company may well represent a significant personal and commercial decision. Once family members have become business associates, personal matters may easily have commercial implications, and vice versa. What’s more the minimum holding requirement of two years is not insignificant.

Summary

If you would like help understanding Business Asset Disposal Relief, please get in touch and one of our Chartered Financial Planners will be happy to help. An initial consultation is on us.

This article offers information about financial planning and should not be taken as personal advice. Any reference to legislation and tax is based on our understanding of UK law and HMRC practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances.

Business Asset Disposal Relief (Entrepreneurs Relief) explained.