In 2008, the Labour Party government introduced Entrepreneurs’ Tax Relief, shortened most commonly to the term most people refer to it as today: Entrepreneurs’ Relief.
Entrepreneurs’ Relief was brought in primarily to encourage entrepreneurs to establish businesses in the UK by lowering the rate of Capital Gains Tax upon disposal, or sale, of the business.
However, most recently in 2020, under new government legislation, Entrepreneurs’ Relief has now been renamed to the Business Asset Disposal Relief.
What is Business Asset Disposal Relief?
Entrepreneurship is not a one size fits all lifestyle. Whilst some entrepreneurs begin businesses and retain the management and control those businesses for life, others seek satisfaction in establishing successful businesses and then selling them on, leaving them free to try conquering new industries and niches.
It is in the sale or passing on of these businesses that entrepreneurs can access benefits by enjoying reduced tax rates. This reduced tax benefit is known as Business Asset Disposal Relief, formerly (and most colloquially), Entrepreneurs’ Relief.
If an entrepreneur is found eligible, Business Asset Disposal Relief applies a reduced rate of 10% capital gains tax on any profits generated when qualifying assets (like a business) are sold.
Capital Gains Taxes are taxes one is required to pay on the increased value of an asset from the sale of that asset. These include the disposal of shares as well as an entire, or part of a business disposal, and also applies if an asset is given away as a gift, unless the recipient is a spouse.
How much Business Asset Disposal can be claimed?
Up to £1 million of entrepreneurs’ relief can be claimed in an entrepreneurs lifetime. Claims can be made as many times as necessary, provided they remain within the £1 million business asset disposal limit.
How to Access Business Asset Disposal Relief:
To be eligible for Business Asset Disposal relief, entrepreneurs must meet the following requirements.
Business Asset Disposal Relief Qualifying Assets:
Certain conditions must be met through what is called the ‘qualifying period’. This period covers two years and ends at the date that the share disposal or sale takes place. Throughout this period, the below listed criteria must be met for the duration:
- The entrepreneur must have been listed as either a sole trader, an officer or employee of the business
- The entrepreneur must have held at least 5% or more of the businesses share capital of and held at least 5% or more of the voting share capital
- The £1 million lifetime business asset disposal limit must not have been exceeded
Differences in eligibility also vary depending on the nature of the sale, for example whether the business’ shares are being sold, or whether the entirety of the business is. Both qualify, but differences are stated as:
When Selling the Business
When either the entirety, or part, of the business is being sold the entrepreneur must be listed as either the business owner, sole trader or a business partner for the duration of the two year qualifying period.
When Selling Shares
When shares of the company are being sold, it is not necessary for the entrepreneur to be listed as company owner. However, they must have been registered as an employee or officer in the business and have held the necessary share capital, for the entirety of the qualifying duration.
In addition when making claims around the disposal or sale of shares, the company must be classified as either a trading company or a holding company of a trading group, and must have traded throughout the qualifying duration.
Does Business Asset Disposal Relief apply to closing businesses?
If a company is dissolving or closing, Business Asset Disposal Relief follows the same guidelines as set out under Entrepreneurs Relief.
The tax relief can still be claimed, but it is imperative the following criteria are met:
- The distribution of company assets must be taxed as capital distribution, not as income
- Distribution of assets must occur three years within the date of cessation of trade
- In two years prior to the company ceasing trading, the normal qualifying conditions were met.
- Similarly entrepreneurs must fulfil the same requirements as per the qualifying conditions: They must be either the registered sole trader or a business partner, and must have either owned or held shares within the business for the minimum of two years.
Targeted anti-avoidance rule (TAAR)
New legislation has been introduced that aims to target business closures who do so as a way of reducing tax, if the limited company is closing by route of Members’ Voluntary Liquidation.
In an MVL, all company assets are converted to cash and distributed between shareholders. These distributions are eligible to Business Asset Disposal Relief as they are taxed as capital gains.
However, new rules prevent business owners from ceasing trading and closing businesses as a way of profiting from the tax efficiency of the capital distribution route, rather than an income distribution.
If the following criteria are not met, distributions from an MVL could be treated as income distributions:
- If the company is registered as a ‘Close company’ (a company that possess five shareholders or less)
- If a shareholder receiving distributions has also been involved with another, similar trade or activity within two years
- If the intentions of closing the business appear to be disingenuous, i.e, in favour of a tax advantage.
If a business can not adequately meet these criteria, the distributions may be subject to income tax, and therefore ineligible for entrepreneurs’ relief.
How to claim Business Asset Disposal Relief
To claim Business Asset Disposal Relief a claim must first be submitted to HMRC. In most cases, this will take the form of a claim submitted on an annual Self Assessment tax return in the supplemental ‘Capital Gains Summary’.
When should claims be submitted?
Just like Self Assessment tax returns, any claims for Business Asset Disposal Relief must also be initiated before the 31st of January following the close of the tax year in which the proposed sale or disposal took place.
For example, a business or shares disposal or sale that was made within the 2018/19 tax year, so between the 6th of April 2018 and the 5th of April 2019, must be submitted by the 31st of January 2021.
Business Asset Disposal Relief Calculator
To calculate the possible Business Asset Disposal Relief:
- Work out the total taxable gain by adding together all capital gains, less any losses
- Subtract the tax-free capital gains allowance
- Whatever the remaining figure is, deduct 10% from. This is what will be paid, leaving the rest as Disposal Relief.
In the current economic climate, enticing entrepreneurs to start new businesses has never been of more importance. The government’s initiative to remodel Entrepreneurs Relief to the Business Asset Disposal Relief is the best option and will provide further support to budding and experienced entrepreneurs.
It is recommended to seek the advice of an accountant before submitting a claim, as accountants can ensure the applicant matches the conditions and will know of any mistakes to avoid which could impact the amount of tax relieved. At iFinance Department, we can assist with this and more. Schedule a call today.