CGT 3 - BADR and investors relief Flashcards
When did the name change from entrepreneur’s relief?
2020/21
When does BADR apply?
When there is a ‘material disposal’ of ‘business assets’
Two main circumstances for BADR
Sole traders and partners selling the whole or part of their business
Company directors / employees selling shares or securities in their ‘personal trading company’
BADR is also available on the disposal of …
- 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
What are the conditions?
- business / shares must have been owned for two years prior to disposal
- personal company (5% rule)
- trading company (20% test)
Define a trading company
A company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities (20% test)
What are the indicators to look at in the 20% test?
turnover
balance sheet assets
staff resources
How is relief given?
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.
What’s the lifetime limit?
£1m
(£10m for disposals before 11 March 2020)
When do you need to make the claim by?
the first anniversary of the 31st January following the tax year of disposal.
Associated disposals are available where the taxpayer….
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.
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?
2 years
3 years
A material disposal must comprise at least 5% shareholding in a company / in partnership assets. What is the exception?
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
Relief on an associated disposal will be restricted under what conditions
- 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
How does relief operate where a company ceases to be a personal company
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.
When do dilution relief elections need to be made by?
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
What’s the lifetime limit for investors’ relief?
£10m per individual
How is investors’ relief given?
10% tax on gains on qualifying assets
Conditions for investors’ relief
- 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
When must a claim for investors relief be made?
Same a BADR. First anniversary of 31 January following the tax year in which disposal takes place.
What are potentially qualifying shares?
Shares which meet the necessary conditions but have not been held for three years
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?
Qualifying Shares
Excluded Shares
Potentially Qualifying Shares (LIFO basis)
