Known as Entrepreneurs Relief prior to 6th April 2020, Business Asset Disposal Relief is a tax relief that the seller of a business can benefit from on sale.
It is an attractive tax incentive, used by the UK Government to encourage individuals to set up and invest in a business by rewarding them for their investment and hard work once they are ready to sell it.
Business Asset Disposal Relief has a lifetime limit of £1 million per person and there are certain rules that must be applied to ensure you qualify.
In this guide, we explain the essentials of Business Asset Disposal Relief, including who is eligible and how to claim.
What is Business Asset Disposal Relief?
When you are ready to sell your business, Business Asset Disposal Relief (or ‘Entrepreneurs Relief’) can benefit you by allowing you to do this at a reduced tax rate. If, when you sell your business, you make a financial gain, you will pay Capital Gains tax to which the following will be relevant:
Everybody has an annual personal tax-free allowance, which at the time of writing (July 2020) is £12,300. This means for the first £12,300 of gain, you will pay no tax.
You may be able to offset any business losses, or losses in the value of an asset against your ‘gain’ so you pay less tax.
You pay tax on your portion of the gain. That means if you own 50% of the business, you will be liable to tax on your 50% of the gains.
You will usually pay tax on the gain (that is, the gain less any allowances in losses) if that gain is above the personal tax-free allowance. You only pay tax on the element that is above your personal tax-free allowance.
If, when you add the gain to your annual earnings, the combined amount is greater than the basic rate income tax band, you will pay 20% tax, otherwise it’s 10%. This does not apply to the sale of residential properties.
If applicable, Business Asset Disposal Relief or previously Entrepreneurs’ Relief will reduce your tax payable to 10%.
How does Business Asset Disposal Relief work?
As mentioned above, this allows you to apply a reduced rate of 10% capital gains tax on the profits you make when selling qualifying assets.
Note that entrepreneurs’ relief is available only to individuals, not businesses. And, you can only claim up to £1m in your lifetime.
Can you claim Business Asset Disposal Relief more than once?
Yes, you can claim Business Asset Disposal Relief more than once, given that it stays within the lifetime limit of £1m.
Any gains that exceed the £1m lifetime tax allowance will go back to being taxed at 20%.
Who can claim Business Asset Disposal Relief?
There are a few pieces of criteria you need to meet to be eligible for Business Asset Disposal Relief. These include the following:
- You are an employee or office holder of a limited company or the sole trader or business partner
- You haven’t already exceeded the lifetime cap of £1m
- You have held 5% or more of the business’s share capital and 5% of the voting share capital
- You need to have met the qualifying period: this is two years with the end date being the date of the share disposal
All of the above criteria must have been met within the past two years.
2020 changes to Entrepreneurs Relief
In March 2020, Chancellor Rishi Sunak announced that a change was to be made to the lifetime cumulative allowance. This would mean that the previous £10m lifetime gains would face a steep cut of 90%, being reduced down to just £1m lifetime gains being available to an individual.
This was a very controversial decision which many said would be likely to discourage people from creating start-ups. The reason this decision was made was to save £6bn to the Treasury over the next five years.
So, in answer to this question, no, entrepreneurs’ relief has not been scrapped – it has been re-engineered, and the key change was the reduction from £10m lifetime gains being reduced to £1m. As mentioned previously, the name also changed to Business Asset Disposal Relief as of this April.
Why was Business Asset Disposal Relief introduced?
The scheme was introduced to reward business owners for spending time building a business and creating employment opportunities. This was originally introduced by Gordon Brown back in 2008.
Since then, there have been many changes to the lifetime limit, as follows:
- In March 2010, the relief was £2 million
- By June that year, it was raised further to £5 million
- This was then doubled to £10 million in March 2011
- In March 2020 this faced a 90% cut, going down to just £1 million.
What are the benefits of Business Asset Disposal Relief?
As we’ve established, the main benefit of Business Asset Disposal Relief is reducing your Capital Gains Tax from a potential 20% down to 10%, meaning you keep more of the profits or gains.
How to calculate Business Asset Disposal Relief
You can calculate Business Asset Disposal Relief in five easy steps:
- Add together the capital gains (what you sold shares/assets for)
- Deduct any losses
- Work out the total taxable gain eligible
- Deduct your Capital Gains personal Tax-free allowance
If you qualify for Business Asset Disposal Relief, you will only pay 10% tax on what is remaining.
How to claim Business Asset Disposal Relief
Claiming Business Asset Disposal Relief must be done through HMRC. The most common way to do this is by submitting a claim on your annual self-assessment tax return. This must be made before the first anniversary of the 31 January following the end of the tax year in which the relevant tax disposal takes place.
Unfortunately, it can be easy to get caught out of being granted Business Asset Disposal Relief on a technicality that has been glossed over. Seeking advice from an accountant is recommended to help you to avoid this.
Due to the huge financial interventions of the Government during the Coronavirus pandemic, we believe that Business Asset Disposal Relief will be further altered to save the Exchequer money in the future and as a way to claw back some of the billions of pounds the Government has pledged by way of interventions during the pandemic.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute tax, financial or legal advice, nor is it a complete or authoritative statement of the rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert tax, financial, legal or other advice should be sought.