CGT 3 - BADR and investors relief

Question 1

When did the name change from entrepreneur’s relief?

Answer 1

2020/21

Question 2

When does BADR apply?

Answer 2

When there is a ‘material disposal’ of ‘business assets’

Question 3

Two main circumstances for BADR

Answer 3

Sole traders and partners selling the whole or part of their business
Company directors / employees selling shares or securities in their ‘personal trading company’

Question 4

BADR is also available on the disposal of …

Answer 4

• an asset used in the business at the time the business ceases, provided the asset is sold within three years of cessation
• shares in a company which has ceased trading, provided the shares are sold within three years of cessation
• associated disposals

Question 5

What are the conditions?

Answer 5

• business / shares must have been owned for two years prior to disposal
• personal company (5% rule)
• trading company (20% test)

Question 6

Define a trading company

Answer 6

A company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities (20% test)

Question 7

What are the indicators to look at in the 20% test?

Answer 7

turnover
balance sheet assets
staff resources

Question 8

How is relief given?

Answer 8

BADR is given by taxing qualifying gains at 10%. These gains are treated as using any unused basic rate band in priority to other gains.

Question 9

What’s the lifetime limit?

Answer 9

£1m

(£10m for disposals before 11 March 2020)

Question 10

When do you need to make the claim by?

Answer 10

the first anniversary of the 31st January following the tax year of disposal.

Question 11

Associated disposals are available where the taxpayer….

Answer 11

makes a material disposal of a partnership interest / shares in a company AND
Owns an asset which is used by the partnership / company AND
sells the asset in conjunction with the material disposal.

Question 12

Associated Disposal

How long must the asset have been used in the business for prior to the disposal?

How long must it have been owned?

Answer 12

2 years

3 years

Question 13

A material disposal must comprise at least 5% shareholding in a company / in partnership assets. What is the exception?

Answer 13

For partnership interests the material disposal can be less than 5% if it is the disposal for the whole of the interest and the individual owned 5% or more for three of the eight years prior to disposal

Question 14

Relief on an associated disposal will be restricted under what conditions

Answer 14

• the asset has not been used in the business throughout its period of ownership
• the individual charges rent for the use of the asset for periods after 5 April 2008

Question 15

How does relief operate where a company ceases to be a personal company

Answer 15

An election can be made for a deemed disposal and reacquisition of the shares immediately before the dilution in order to retain entitlement to BADR

An election can also be made for the notional gain to be deferred until the actual shares are sold.

The individual must have been an employee for the two years prior to the date the notional gain becomes chargeable.

Question 16

When do dilution relief elections need to be made by?

Answer 16

The election for the deemed disposal must be made by the first anniversary of 31 Jan following end of the tax year in which notional disposal takes place

The election to defer the gain must be made within four years of the end of the tax year of the notional disposal

Question 17

What’s the lifetime limit for investors’ relief?

Answer 17

£10m per individual

Question 18

How is investors’ relief given?

Answer 18

10% tax on gains on qualifying assets

Question 19

Conditions for investors’ relief

Answer 19

• shares must be in a trading company
• shares must be new ordinary shares subscribed for cash
• the individual cannot usually be a director or employee
• the shares have been held for three years

Question 20

When must a claim for investors relief be made?

Answer 20

Same a BADR. First anniversary of 31 January following the tax year in which disposal takes place.

Question 21

What are potentially qualifying shares?

Answer 21

Shares which meet the necessary conditions but have not been held for three years

Question 22

3here only part of a holding is disposed of, for the purpose of calculating the amount of the gain relating to qualifying shares, shares are deemed to be disposed of in which order?

Answer 22

Qualifying Shares
Excluded Shares
Potentially Qualifying Shares (LIFO basis)