Chapter 10 Business Asset Disposal Relief Flashcards
10.1 BADR
Relief is available where:
• There is a material disposal of business assets, or
• A disposal which is associated with a material disposal
Generally, BADR is available to:
• Sole traders and partners selling the whole or part of their businesses – this included furnished holiday lettings
• Company directors and employees who dispose of shares or securities in the personal trading company that they work for, and
• Company directors and employees who acquired shares under the EMI option scheme
BADR must be claimed on or before the first anniversary of 31 January following the tax year of qualifying disposal, no later than January 2023 for disposals in 20/21.
10.2 Operation of the relief
The relief reduces the rate of capital gains to 10% in qualifying disposals. There is a lifetime limit of £1 million (for disposals prior to 11 March 2020 the limit was £10 million). Gains eligible for this relief are treated as using up any unused basic rate band in priority to other gains.
10.4 Material disposals of business assets
BADR is available to taxpayers who make a material disposal of business asset. A business asset means:
• The whole or part of a sole trade or partnership business, or
• A disposal of an asset used in a business at the time the business ceases to be carried on, or
• A disposal of shares in a company
Whole or part of a business:
The individual must be disposing of the whole or part of their business. The disposal of a single asset used in the business does not qualify. A material disposal means the business must have been owned by the taxpayer for at least 2 years prior to the disposal.
Asset used in the business at the time the business ceases – material means the business must have been owned by the taxpayer 2 years prior to the disposal and the asset must be sold within 3 years of cessation.
Shares in a personal company – for the disposal of shares in a company, material means that for at least 2 years prior to the disposal:
• The company is the taxpayers personal trading company (5% of ordinary share capital), and
• The taxpayer must work for the company. There is no minimum hour stipulation, so part time employees count.
The sale of securities (loan stock etc) in a company will be eligible for relief, but this will only be the case where the loan stock is in a company which the taxpayer is an employee or director and meets the condition of a personal company. The disposal of shares in a company ceasing to trade must satisfy the material disposal condition, must own 2 years prior to cessation and disposal takes place within 3 years of cessation.
10.5 Associated disposals
Associated disposals also qualify for BADR. An associated disposal is:
• A taxpayer makes a material disposal of a business or shares/securities in a company, and
• As part of the withdrawal of the individual from the business, he makes a disposal of an asset which had been used in that business, and
• The asset disposed of had been used in that business for at least two years and (for assets acquired on or after 13 June 2016) has been owned by the individual three years prior to disposal
Associated disposals do not apply to sole traders and cannot apply to isolated disposals of assets. In order for relief to be available there must not normally be a significant interval of time between associated disposal and the material disposal. HMRC accept that there has been an associated disposal so long as the asset was used in the business in the period 2 years before cessation and the disposal takes place within 1 year of the business’s cessation or within 3 years so long as the asset has not been leased or used for any other purpose in the meantime.
10.6 Associated disposals – rent for use of assets
If rent has been charged by the individual to the business for the use of the asset now being sold, this receipt of rent restricts the availability of BADR. Gains eligible for relief are restricted on a reasonable basis, this means that:
• If no rent is charged, full relief is available
• If a full commercial rent is charged, no relief is available
• If rent is below commercial rates, some relief is available
10.7 Relief where a company ceases to be a personal trading company
An individual can have a shareholding of more than 5% so the company is a personal trading company but the shareholding can fall below 5% if additional shares are issued.
From 6 April 2019, relief is available for gains made before an individual’s shareholding is diluted to less than 5% so that relief is still available in respect of the gains made before the dilution. An election can be made for a deemed disposal and reacquisition of the shares immediately before the dilution. This election will result in a notional gain in respect of which a claim for BADR can be made.
The amount of deemed sale proceeds is the value of shares at market value prior to the new share issue. This value will become the base cost of the actual shares going forward. When the actual shares are sold BADR is not available if the personal company conditions have not been met for 2 years prior to the disposal.
For the election to apply, the company must cease to be the individual’s personal company as a result of an issue of shares wholly for cash and all the conditions for a disposal of shares to qualify for relief must be met immediately before the share issue.
An additional election can be made to defer the notional gain until the actual shares are disposed of. When the deferred gain becomes chargeable, a claim for BADR must be made by the first anniversary following the tax year in which the gain is treated as accruing. In order to qualify for relief when the deferred gain becomes chargeable, the individual must be an employee for 2 years prior to the actual disposal.
The election for relief as a result of the dilution od a shareholding must be made by the first anniversary of 31 January following the tax year in which the notional disposal is made. If the notional disposal occurs in 20/21, the election must be made by 31 January 2023. The election for deferral must be made within 4 years of the end of the tax year of the notional disposal, so by 5 April 2025 for notional disposals in 20/21. Both elections are irrevocable.
