BADR Benefits: Key Actions to Take Before Policy Updates

Every entrepreneur knows the sweat, sacrifice, and determination it takes to build a business. But what if there was a way to ensure that when the time comes to sell or step back, you keep more of what you’ve earned? Learn about Business Asset Disposal Relief (BADR) which is a golden key that helps business owners unlock tax savings and maximize their exit strategy. Let’s see how Business Asset Disposal Relief can transform the culmination of your business journey into a financial win and how accounting firms can help.

Understanding Business Asset Disposal Relief (BADR)

Business Asset Disposal Relief (BADR) is a tax relief scheme in the UK that permits the eligibility of entrepreneurs to incur a lower Capital Gains Tax (CGT) when disposing of their business. If you are eligible for disposed assets, the owner will enjoy a reduced % CGT rate of 10%, with a lifetime cap of £1 million. There is no similar difference in the typical CGT rate, which can reach up to 25% for taxpayers with higher incomes.

It was known as Entrepreneural tax relief before the updates of 2020 budget. The significant change brought about by the budget was the cutting of lifetime allowance from £10 million to £1 million. The aim of this adjustment was to direct this tax relief to authentic small business owners whilst limiting the misuse of this relief by the bigger business owners.

The government’s intention was to reconcile entrepreneurial incentives with accountability.  During 2020 budget, its name was altered, and the threshold was reduced, yet the basic purpose of Business Asset Disposal Relief (BADR) to promote entrepreneurship continues. Qualifying assets and the criteria for qualification remained unchanged.

Which Assets Qualify for Business Asset Disposal Relief (BADR)?

Disposal of Whole or Part of a Business

Business Asset Disposal Relief (BADR) can be claimed when an owner disposes of all or part of their business, provided the business has been owned for a minimum of two years. This provision applies to individuals such as partners, sole traders, and company shareholders selling significant stakes in their enterprise.

Disposal of Shares and Securities

Shareholders who hold at least 5% of a company’s shares and voting rights for at least two years may qualify for Business Asset Disposal Relief (BADR) when they sell their shares. Additionally, they must have served as an officer or employee of the business during this period.

Requirements for Material Disposal

To qualify for Business Asset Disposal Relief (BADR), the taxpayer must meet specific conditions:

• The individual must have been an employee or director of the company (or group) for at least two years. Part-time roles are also eligible.
• The business must be the taxpayer’s personal company, which means they must own at least 5% of the company’s voting rights and ordinary share capital. They must also be entitled to at least 5% of either the total sale proceeds of the company’s ordinary share capital or the distributable profits and assets upon the company’s liquidation.
• The company must meet the “20% trading test,” ensuring that no more than 20% of its activities involve non-trading sectors such as real estate or investments.

Disposal of Assets Used in a Ceased Business

Business Asset Disposal Relief (BADR) may also apply to the sale of assets, such as real estate or machinery, used in a business that has ceased operations. To qualify, the disposal of these assets must occur within three years of the business’s closure.

Special Conditions for Trustees

Trustees may claim Business Asset Disposal Relief (BADR) on behalf of beneficiaries, provided the beneficiaries would have been eligible for the relief if they had directly owned the assets. In such cases, both the beneficiary and the trust must meet the qualifying conditions.

Who is Eligible?

General Eligibility Criteria For:

• Sole Trader & Partnerships
• To be eligible, Business partners and sole proprietors need to have possessed the business for a minimum of two years prior to the disposal date, if they sell or dispose of their business assets.
• This includes the sale of the entire company, a part of the company, or shares in a partnership. If properties such as buildings or equipment are sold during the company’s closure or sale, BADR also pertains to those transactions.
• Shareholders & Company Employees
• Shareholders in a limited company can qualify for BADR if they possess no less than 5% of the voting rights or shares of the company. This is referred to as the personal company. This indicates that the person must be an officer or employee of the organization. This situation indicates that only those who are actively participating in the business can take advantage of this relief.
• To qualify for BADR, a personal firm needs to meet specific criteria:
• The person must possess at least 5% of the company’s share capital and voting rights.
• The applicant should have been employed by the company for a minimum of two years as either an employee or an officeholder (secretary or director).To qualify for relief, these conditions must have been satisfied both at the time of the disposal and during the two years prior to it.

Conditions for Claiming BADR

• 2-Year Ownership Requirement
  • To qualify for BADR, individuals must have owned the eligible business or assets for at least two years before the date of disposal or sale.
• 5% Rule for Shares and Voting Rights
  • Shareholders must hold at least 5% of the company’s shares and voting rights.
  • They must also have been an employee or officer of the company during the two-year qualifying period.
• What Defines a Trading Company?
  • The company must primarily engage in commercial activities, such as selling goods or services.
  • At least 80% of the company’s operations must be trade-related, rather than focusing on non-trading or investment activities.
• Post-Cessation Sales: 3-Year Window
  • Business owners can claim BADR on the sale of assets from a closed business for up to three years after the closure.
  • Qualifying assets may include real estate or machinery that was used in the business.

Key Actions to Take Before the Policy Updates

The Change

• The change is undoubtedly on the way, as stated by the Chancellor in her Budget on 30 October.
• The Chancellor stated that the relief will stay in its existing form until the end of the tax year – a significant comfort for those who attempted but were unable to finalize a sale by the Budget date, anticipating that BADR would vanish.
• Starting 6 April next year, we will observe some modifications that will gradually reduce the value of the relief.
• Beginning on 6 April 2025, the BADR tax rate will rise from 10% to 14%, and subsequently, on 6 April 2026, it will increase to 18%.
• The £1 million threshold stays unchanged, but as of today’s date, the highest BADR tax saving is £140k (compared to the current main rate of CGT at 24%), which will decrease to £100k starting April 2025 and further fall to £60k from April 2026.

Accounting Firm in London, UK

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