Entrepreneur’s Relief can help reduce your capital gains tax bill if you sell your business. In 2020, it was renamed ‘Business Asset Disposal Relief (BADR)’.
Currently (2021), you can claim the Relief up to a lifetime limit of £1m, although this limit had changed several times since the scheme was first created in 2008.
Here’s a guide for business owners explaining what BADR is, how you qualify for the relief, and what you need to do to claim it.
Background to Entrepreneur’s Relief (BADR)
Entrepreneur’s Relief was first introduced in 2008. The 2008 Budget abolished the taper relief rules on business disposals and brought in a new flat rate of Capital Gains Tax at 18%.
These measures meant that business owners who had built a business over many years, sometimes their lifetime, would have to pay a much higher rate of Capital Gains Tax when they came to sell their business.
As this could discourage entrepreneurs from building businesses, generating employment, and creating wealth the government announced the introduction of Entrepreneurs’ Relief. This new relief was designed to compensate business owners who would have paid a lower rate of Capital Gains Tax (CGT) under the previous taper relief rules.
The relief allowed business owners to pay an effective 10% capital gains tax rate on business disposals up to a lifetime ‘allowance’ of £1m. In the first 2010 Budget, Alistair Darling raised the lifetime limit to £2m. This was further extended to £5m in the ‘Emergency Budget’ of 2010, effective from 23rd June 2010, and further increased to £10m in the Budget of 2011, effective from April 6, 2011. The lifetime limit was reduced to £1m for disposals made after April 6th 2020.
Individuals can claim ER as many times as they like, subject to the prevailing lifetime limit.
Entrepreneur’s Relief (BADR) – Qualifying as a business owner
In order to claim entrepreneurs’ relief, a number of conditions must be met, during a 24-month ‘qualifying period’ before you sold the business.
- During the qualifying period, you were either a sole trader or an officer (director/secretary), or employee of a limited company.
- During the qualifying period, you owned at least 5% of the capital and voting rights, if the disposal relates to a company.
- You can claim relief on proceeds from a partial or full sale of a business, shares in a company, or on the value of any business assets remaining after the company has ceased trading, as long as you were either a business partner in a company, or the exclusive business owner (if you were a sole trader).
- If the business ceased trading, this must have taken place no more than 3 years prior to the sale date.
- If you’re selling a ‘going concern’, then the business must be financially viable at the time of sale.
- You cannot claim ER for the disposal of non-commercial property.
- You can claim as many times as you like, subject to a lifetime allowance. From, April 6, 2020, the lifetime allowance for entrepreneurs relief is £1m. You will pay the standard CGT rate on any proceeds beyond this limit.
- If the business is owned by a couple (spouse or civil partner), each person can apply for ER as long as they individually meet the eligibility criteria listed above.
- Further rules apply for the disposal of business assets following business cessation, shares/securities and goodwill.
Investors’ Relief still qualifies for £10m lifetime allowance
Although Investors Relief is similar to ER, it is a separate Relief aimed at individuals who invest in early-stage companies.
It applies to investors for qualifying disposals made after 6th April 2019.
To meet the eligibility criteria as an investor, the following have to apply:
- You must have held the shares for at least three years prior to the disposal.
- You must have held the shares continuously for this period.
- The investment must be in a trading company, or the holding company of a trading group.
- Investors’ Relief is only available to investors who are not involved in the running of the business.
- The shares must not be listed on a major stock exchange, although those listed on AIM are allowed. This is to encourage investment in smaller companies, not established ones.
- The shares must be newly issued, not acquired from another individual.
Significantly, the £10m lifetime limit still applies to Investors’ Relief (correct as of March 2021). Read the official guidance here.
How do you calculate your ER liability?
- Calculate your total CGT liability relating to the disposal.
- Take off your annual CGT allowance, if you’re eligible (£12,300 in 2020/21)
- Your liability is 10% of the remaining amount.
- Any CGT owed beyond the £1m lifetime limit is levied at the standard higher rate of CGT (currently 20%).
What is the deadline for paying your ER liability?
Your claim must be submitted to HMRC by the first anniversary of the 31st January following the end of the tax year in which the qualifying disposal takes place.
For example, if you make an eligible disposal during the 2020/21 tax year (which ends on 5th April 2021), the claim must be submitted (and tax paid) by 31st January 2023.
How do you pay your ER liability?
You should complete the supplementary capital gains section of your annual self assessment form.
The rules are complex, and you need to make sure you meet a variety of qualifying conditions before claiming the Relief. For obvious reasons, we recommend you read the official guidance and talk to your accountant before making a claim.