Business Asset Disposal Relief reduces Capital Gains Tax (CGT) on business asset sales if certain conditions are met. This relief lowers the CGT rate to 10% regardless of business asset type or tax bracket, with a lifetime cap of £1 million. The regulatory framework for this relief is complex and full of pitfalls, so careful attention must be paid to qualifying conditions.
This relief requires compliance with the qualifying conditions for 24 months before the asset sale, emphasising the importance of strategic advance planning. This relief covers the disposal of businesses, shares in companies, and specific assets used in business operations or by the company.
When selling shares, a company must be actively trading and have no significant non-trading activities. The shareholder seeking relief must also have held a 5% stake in the ordinary share capital and voting rights and been an officer or employee of the company for the year prior to the sale.
Top Errors to Dodge While Seeking Business Asset Disposal Relief
Business Asset Disposal Relief applicants must avoid common mistakes that might negatively impact their applications. Avoid insufficient documentation or incomplete records, which can raise assessment red flags.
Asset valuation or categorisation errors can also cause issues. Failure to meet eligibility requirements may also result in a denied application. Therefore, meticulous attention to detail and a thorough understanding of the relief’s requirements are necessary for a smooth application.
Certain blunders to watch out for in the process of applying for Business Asset Disposal Relief are:
Substantial Non-trading Activities
If a business has substantial non-trading activities, it might not meet the eligibility criteria for BADR. The relief is intended to provide tax benefits to genuine trading businesses, and if a significant part of a company’s activities is not related to trading, it could raise concerns about whether the business truly qualifies for the relief.
To ensure a successful BADR claim, businesses should ensure that their main focus is on trading activities rather than diversions into unrelated areas. Otherwise, attempting to claim the relief in such cases could result in a rejected claim or even potential issues with tax authorities due to misrepresentation of the nature of the business’s operations.
A ‘trading company’ is a company carrying on trading activities whose activities do not include, to a substantial extent (more than 20% of turnover or asset base or total expenses) of activities other than trading activities like accumulating excessive cash reserve, actively managing deposits to generate investment returns and making loans.
As per HMRC, it would not seek to test if the company had a particularly poor trading year such that taking isolation point of view, the investment activity took unusually a larger portion of the total activity carried out by the business.
Here, HMRC will look at the history of the company and take the balanced approach as testing if the company is trading or not.
If non trading assets such as shares and debentures, investment properties, etc make up more than 20% of total asset of the company, this could mean that non trading activity are substantial. To check the value, current market value or cost at the time of acquisition of such asset could be an appropriate measure.
If 20% or more of the time is involved in a non-trading activity, it could mean that the business is carrying out substantial non-trading activities.
In the instance where it is not sure about if the company is carrying out significant non-trading activities it is therefore advised to the company to seek an opinion from the HMRC on its trading status for the non-statutory clearance services.
Sale of whole or part of a business
There have been numerous cases in the past which dealt with and clarified Retirement relief and enterprise relief. These cases are relevant to make the judgment and make a better understanding of as to what BADR is and who can use it.
The term “Whole or part of business” can be understood in different ways. For a person to get the benefits of Business Asset Disposal Relief, they need to sell a significant part of their business. And what’s left of the business after the sale should not be able to function normally as it did before.
If some parts of the business are still running after selling some assets, we need to figure out all the things connected to that specific part of the business. To qualify for BADR, all those connected activities must stop when the assets are sold. On the other hand, if assets are sold but nothing really changes in terms of what the business does, then we can’t say that a part of the business was sold. In such cases, the relief doesn’t apply.
Avoiding the deadline for claiming BADR
In most of the case, the claim should be made at the time of filing the self-assessment tax return.
In case it was not, BADR must be claimed on or before the first anniversary of the 31 January following the tax year of disposal.
For example, of whole or part of a business was disposed of on 14 October 2023, the BADR claim has to be made within 31 January 2025.
Therefore, the claim for BADR has to be made within the deadline to claim BADR.
Levying rent to a company or partnership for the utilisation of assets held personally
In the case of an associated disposal, if rent has been charged by the individual to the business for the use of the asset now being sold, this receipt of rent restricts the availability of BADR.
Here’s how it works:
- If you didn’t charge any rent, you can get the full tax relief.
- If you charged the full regular rent that anyone would pay, you can’t get any tax relief.
- If you charged less than the regular rent, you could get some tax relief, but it might be limited.
But this rule only counts from April 5, 2008, onwards. So, any rent you got before that date won’t affect the tax relief. If you decided not to take the rent from April 6, 2008, onwards, you can get the full tax relief again.
Ownership of the Asset
The business Asset disposal relief is not available on the assets which is used in the business that is in the name of the company.
Therefore, a consideration has to be given as to who owns the asset. Even if the asset holds the significance in the business if the ownership is not in the name of the individual, the relief can not be claimed.
Key Considerations and Conclusion
In conclusion, Business Asset Disposal Relief offers a valuable opportunity to reduce Capital Gains Tax on business asset sales. However, successful navigation of this relief requires careful attention to qualifying conditions.
Ensuring compliance for a minimum of 24 months prior to the sale, avoiding substantial non-trading activities, accurately valuing assets, meeting ownership criteria, and being mindful of rent implications are key considerations. By addressing these aspects and adhering to the relief’s guidelines, applicants can optimise their chances of securing the benefits and minimising potential obstacles.