CGT3 BADR & Investors relief Flashcards
BADR was called entrepreneurs’ relief prior to
2020/21.
Business asset disposal relief (BADR) applies where there is a
‘material disposal’ of ‘business assets’
- 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 the following:
- An asset used in a 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
To qualify for BADR how long must the business / shares have been owned for?
The business or shares must have been owned for two years prior to sale.
Define a personal company
A personal company is one where the shareholder owns at least 5% of the ordinary share capital and by virtue of that holding is able to exercise at least 5% of the voting rights. In
addition, the shareholder must either be entitled to at least 5% of the distributable profits and 5% of the assets available on a winding up, and/or be entitled to at least 5% of the proceeds of a disposal of the whole of the ordinary share capital of the company.
These conditions must be satisfied for two years prior to disposal.
Define a trading company
A ‘trading company’ is ‘a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities’.
‘Substantial’ means not more than 20% of indicators including turnover, balance sheet assets and staff resources
How is BADR 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.
Lifetime limit?
BADR is only available in respect of eligible gains up to the lifetime limit of £1 million (£10 million for disposals before 11 March 2020).
Gains in excess of the lifetime limit are taxed at normal CGT rates.
When must BADR be claimed by?
BADR must be claimed on or before the first anniversary of the 31 January following the tax year of disposal.
‘Associated disposals’ will also qualify for BADR. This will be the case if ……
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.
The asset must have been used in the business for at least two years and must have been owned for three years prior to the disposal.
For an associated disposal how long must the asset have been used/owned
The asset must have been used in the business for at least two years and must have been owned for three years prior to the disposal.
The material disposal must comprise at least a….
5% shareholding in a company/a 5% share
in partnership assets.
There is an exception for partnership interests – the material disposal can be less than 5% where it is the disposal of the whole of the interest and the individual owned 5% or more for
three of the eight years prior to disposal.
What’s the exception to the 5% rule for partnership interests
There is an exception for partnership interests – the material disposal can be less than 5% where it is the disposal of the whole of the interest and the individual owned 5% or more for
three of the eight years prior to disposal.
Relief o an associated disposal will also be restricted if:
- 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
What happens if an individual’s shareholding is diluted as a result of the issue of additional shares in a company for cash?
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 on the gains made prior to the dilution.
The conditions for a disposal of shares to qualify for relief must be met immediately before the share issue.
The election must be made by the first anniversary of 31 January following the tax year in which the notional disposal takes place.
An election can also be made within four years of the end of the tax year of the notional disposal 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 in order to claim relief on the deferred gain.
