Business Asset Disposal Relief is a form of tax relief that allows a company director to sell all or part of their business and pay just 10% in Capital Gains Tax on the profits they have made up to a limit of £1 million. Continue reading to find out more about Business Asset Disposal Relief and whether you could benefit from it.
What is Business Asset Disposal Relief?
Business Asset Disposal Relief (formerly Entrepreneurs Relief) applies Capital Gains Tax at a discounted rate of 10% on profits of up to £1 million if you close down or sell your business. This is significantly lower than the Capital Gains Tax rates you would pay otherwise.
How does it work?
When disposing of an asset and calculating your gain, you may be able to offset any business losses, or losses in the value of an asset, against the gain to reduce the amount of tax owed. You will only pay tax on the gain if it is above the Capital Gains tax-free allowance, which for the 2023/24 tax year is £6,000. You will also only pay tax on the proportion of the gain that you own. For example, if you own 50% of the business, you will only pay tax on 50% of the gains.
If you add your gain to your annual earnings and the combined amount is greater than the basic rate income tax band, you will pay 20% tax. If the amount is within the basic rate income tax band, you’ll only pay 10% tax. If you can benefit from Business Asset Disposal Relief, this will reduce your tax payable to 10% up the limit of £1 million – significantly reducing the amount of tax you owe.
Business Asset Disposal Relief is only available to individuals, not businesses and does not apply to the sale of residential properties. As it is a lifetime allowance, you do not have to use it up in one single claim, and you can claim the relief more than once up to the limit of £1 million. Any gains that exceed £1 million will be taxed at 28% on gains made on residential property and 20% on gains from all other chargeable assets.
For more information about working out the tax you owe, please visit the government’s website.
What is the eligibility criteria?
To qualify for relief, both of the following must apply for at least 2 years up to the date you sell your business:
- You’re a sole trader or business partner
- You’ve owned the business for at least 2 years
Selling shares or Security
To qualify, both of the following must apply for at least 2 years up to the date you sell your shares:
- You’re an employee or office holder of the company (or one in the same group)
- The company’s main activities are in trading (rather than non-trading activities like investment) – or it’s the holding company of a trading group
There are also other rules depending on whether or not the shares are from an Enterprise Management Incentive (EMI).
If you’re selling assets you lent to the business
To qualify, both of the following must apply:
- you’ve sold at least 5% of your part of a business partnership or your shares in a personal company
- you owned the assets but let your business partnership or personal company use them for at least one year up to the date you sold your business or shares – or the date the business closed
How to calculate Business Asset Disposal Relief?
You can calculate how much Business Asset Disposal Relief you could be eligible for by following these simple steps:
- Work out the gain for all qualifying assets
- Add together the gains (and deduct qualifying losses) to work out the total taxable gain that’s eligible for Business Asset Disposal Relief
- Deduct your tax-free allowance
- You’ll pay 10% on what is left
For more information, please visit the government’s website.
How to claim Business Asset Disposal Relief?
You must contact HMRC to claim for Business Asset Disposal Relief. The most common way to do this is by submitting a claim on your annual self-assessment tax return. You should claim before the first anniversary following the end of the tax year in which the business was sold or the tax disposal took place.
Speak to your Account Manager for more information
If you would like more information about Business Asset Disposal Relief and are a client of Fusion Business Services, please schedule a call with your Account Manager, who will be happy to discuss this with you.
For more information about our limited company accountancy service or to find out how we can support you and your business, please give our team a call on 0800 2294020. Alternatively, you can schedule a free consultation with one of our professionals at a convenient time.
