If you’re a business owner looking to sell or close down your business, you may be eligible for Business Asset Disposal Relief, which allows you to pay a reduced Capital Gains Tax rate of 10% on qualifying assets. Previously known as Entrepreneurs’ Relief, this relief can provide significant tax savings if you meet the eligibility criteria. To qualify, you must be a sole trader or business partner and have owned the business for at least 2 years. If you’re selling shares or securities, there are additional conditions to meet. It’s important to understand the requirements and rules to ensure you can take advantage of this tax relief.
Business Asset Disposal Relief: A Comprehensive Guide
Eligibility
Qualifying for Business Asset Disposal Relief
If you are looking to sell all or part of your business, you may be eligible for Business Asset Disposal Relief. This allows you to pay a reduced rate of Capital Gains Tax (CGT) of 10% on all gains from qualifying assets. It is important to note that Business Asset Disposal Relief was previously known as Entrepreneurs’ Relief before 6 April 2020.
Conditions for Relief
To qualify for Business Asset Disposal Relief, you must meet specific conditions. These conditions vary depending on whether you are selling your business or shares/securities.
Ownership Requirements
If you are selling your business, you must meet the following ownership requirements:
- You must be a sole trader or business partner.
- You must have owned the business for at least 2 years.
These conditions also apply if you are closing your business instead of selling it. Additionally, you must dispose of your business assets within 3 years to qualify for relief.
Timeframe for Qualification
For both selling your business and selling shares/securities, you must meet the qualifying conditions for at least 2 years leading up to the date of the sale. This timeframe is crucial to determine your eligibility for Business Asset Disposal Relief.
Qualifying for Relief in Share or Securities
If you are selling shares or securities, there are additional criteria to consider:
- You must be an employee or office holder of the company (or one in the same group).
- The company’s primary activities must be in trading, rather than non-trading activities like investment.
- If the shares are from an Enterprise Management Incentive (EMI), you must have bought them after 5 April 2013 and been given the option to buy them at least 2 years before selling them.
- If the shares are not from an EMI, the business must qualify as a “personal company” for at least 2 years before selling the shares. This requires you to have at least 5% of the shares’ voting rights and entitlement to at least 5% of either the profits, assets on winding up, or disposal proceeds of the company.
Qualifying for Relief in Enterprise Management Incentive (EMI)
For shares that are from an EMI, the specific rules mentioned earlier apply. It is important to understand these requirements to ensure eligibility for Business Asset Disposal Relief.
Work out your tax
When it comes to calculating the tax on your gains, the method you use will depend on whether all your gains are eligible for Business Asset Disposal Relief. As a second person, it’s important to understand the process and options available to you.
If all your gains qualify for Business Asset Disposal Relief
If all your gains are eligible for Business Asset Disposal Relief, you need to follow these steps to work out your tax liability.
- Calculate the gain for each qualifying asset. This involves subtracting the amount you paid for the asset from the amount you received when you disposed of it.
- Add together the gains from all qualifying assets and deduct any qualifying losses. This will give you the total taxable gain that is eligible for Business Asset Disposal Relief.
- Deduct your tax-free allowance, which is also known as the Annual Exempt Amount. This is the amount of gain you can make each tax year without paying tax.
- Once you’ve deducted your tax-free allowance, you’ll pay a flat rate of 10% tax on what’s left.
If you have other gains
If you have other gains that do not qualify for Business Asset Disposal Relief, the amount of tax you pay will depend on your Income Tax rate. Let’s explore the options available to you based on your Income Tax rate.
Higher rate Income Tax payers
If you fall into the higher rate Income Tax bracket, the tax rates for your non-qualifying gains are as follows:
- 28% on gains made from residential property
- 20% on gains made from other chargeable assets
However, you have the option to utilize your tax-free allowance against the gains that would be charged at the highest rates. This means that you can reduce your tax liability on those gains.
Basic rate Income Tax payers
If you are a basic rate taxpayer, the tax rate you’ll pay on gains that are not eligible for Business Asset Disposal Relief can be calculated using the following steps:
- Determine your taxable income by deducting your Personal Allowance and any other Income Tax reliefs you’re entitled to.
- Subtract this amount from the basic rate tax band for the tax year in question. For the 2022 to 2023 tax year, the basic rate tax band is £37,700.
- The remaining amount is the basic rate band that you can use against your gains.
- Calculate your total taxable gain and use the basic rate band first against any gains eligible for Business Asset Disposal Relief. These gains will be subject to a 10% tax rate.
- Use any remaining basic rate band against your other gains. Here, you’ll pay 18% on gains made from residential property and 10% on gains from all other chargeable assets.
- For gains above the basic rate band, you’ll pay 28% on residential property gains and 20% on gains from other chargeable assets.
Remember, you can use your tax-free allowance against gains that would be charged at the higher rates to reduce your tax liability.
How to claim
To claim Business Asset Disposal Relief, you have two options: through your Self Assessment tax return or by filling in Section A of the Business Asset Disposal Relief helpsheet.
Completing and Submitting Your Self Assessment Tax Return
If you already file a Self Assessment tax return, you can claim Business Asset Disposal Relief by completing the relevant sections of the form. Provide accurate information regarding the assets disposed of, their cost, proceeds, and any other required details. Ensure that you submit your tax return by the deadline to avoid penalties.
Including Section A for Business Asset Disposal Relief
If you choose to claim the relief using the Business Asset Disposal Relief helpsheet, you need to complete Section A of the helpsheet. This section requires you to provide detailed information about the disposal, including the asset type, disposal date, and calculations of the chargeable gain and relief claimed.
Summary of Business Asset Disposal Relief
Business Asset Disposal Relief allows individuals selling all or part of their business, shares, or securities to pay a reduced rate of 10% on qualifying gains. This relief aims to provide support to entrepreneurs and business owners and encourage investment and growth in the economy.
Important Considerations
When considering Business Asset Disposal Relief, it is essential to carefully review the eligibility criteria, understand the relief’s implications, and consider any additional tax planning strategies. Seeking professional advice can help ensure compliance with the requirements and maximize the benefits of the relief.
Seeking Professional Advice
Navigating the complexities of Business Asset Disposal Relief can be challenging. To ensure compliance with the eligibility criteria and optimize your tax position, it is strongly recommended to seek professional advice. Tax professionals can provide tailored guidance based on your specific circumstances and help you make informed decisions.
By understanding the eligibility requirements, tax calculations, claiming process, and considerations when selling your business or assets, you can confidently take advantage of Business Asset Disposal Relief. Remember to seek professional advice to ensure compliance with tax regulations and optimize your tax position.