At a glance

At a glance

Entrepreneurs' Relief (ER) was renamed Business Asset Disposal Relief (BADR) by Finance Act 2020. 

BADR is a Capital Gains Tax (CGT) relief that reduces the rate of tax paid on the disposal of business assets where the disposal proceeds are high enough to take you into the higher tax bands.

It can apply to disposals of:

• A sole trade and its assets.
• Partnership interests and assets.
• Shares in your own company.
• Joint venture interests.
• Business assets held by a trust.

When is BADR available?

• It is available to CGT disposals made by individuals and trustees. It does not apply to disposals by companies.
• It applies to qualifying disposals of business assets. It does not apply to the disposal of investment or non-business assets.

The effect of BADR

• It reduces the rate of CGT payable on qualifying disposals to 10%. 
• An individual may claim BADR up to a lifetime limit of qualifying capital gains.

Restrictions

• BADR does not apply to Carried Interest gains, these continue to be charged at normal CGT rates of 18% and 28%.

How BADR works 

Chargeable gains covered by BADR are taxed at a tax rate of 10%.

The amount of BADR given depends on the amount of the individual's BADR lifetime limit after taking previous disposals into account at the date of the disposal.

The lifetime limit is as follows:

• £1 million from 11 March 2020.
• £10 million from 6 April 2011 £5 million from 23 June 2010.
• £2 million from 6 April 2010 to 22 June 2010.
• £1 million for 2008-09 and 2009-10.

Gains in excess of the lifetime limit will be charged at the CGT rate applicable for that period.

The 'mechanics' of this relief have changed over the years, if you have made several disposals in your lifetime, this can make the calculation of your lifetime limit tricky.

For example

John owns a sole trade and four companies and he disposes of his business and his shareholdings between 2009-10 and 2020-21 as follows.

He sold his sole trade and business premises making a £2 million capital gain in September 2009. The disposal qualified for BADR and his gain was taxed as follows:

In May 2010 he sells all his shares in his first company, the £2 million gain qualifies for BADR. The lifetime limit increased to £2 million on 6 April and so he now has £1 million of BADR available to use up as follows:

In July 2010 he sells his second company making a £5 million gain which again qualifies for BADR. The lifetime limit increased to £5 million on 23 June and so he now has £3 million of BADR available to use up as follows:

*CGT rate increases for higher rate taxpayers from 23 June 2010

In May 2018 he sells his third company making a £6 million gain which again qualifies for BADR. The lifetime limit increased to £10 million on 6 April 2011, as he has used up £5 million of his lifetime limit on his previous disposals only £5 million qualifies for relief.

** CGT rate decreases to 20% for non-residential for higher rate tax payers from 2016-17.

In April 2020 he prepares to sell his fourth company, making a gain of £2 million. As the lifetime limit has now reduced to £1 million, he is unable to make a claim for BADR. He may claim his annual exemption against the gain and CGT will be paid on the gain at 20% as a higher rate taxpayer. The lower 10% rate will apply if he has any of his Income Tax basic rate band available. 

Notes

• An individual will be able to make more than one claim for relief up to the total of the lifetime limit prevailing at the date of the disposal.
• In these examples, John can use his annual exemption to offset his gains that do not qualify for BADR. If all his gains qualified for BADR he would deduct his available annual exemption from the gain before calculating BADR.

Different forms of BADR

BADR applies to a 'material disposal' of business assets, there are separate rules for the different classes of asset. These comprise:

Try the Virtual Tax Partner© Toolkits for BADR

These online tools are designed to work through the complex rules in minutes, they cover:

BADR: business and asset disposals (sole traders)
This toolkit covers around 50 different permutations of the rules covering disposals made by an individual.

• Between 6 April 2014 and 29 October 2018.
• Between 29 October 2018 and 5 April 2019.
• On or After 6 April 2019.

BADR: share disposals
This toolkit covers share disposals and share disposals following incorporation and all the different permutations of the relief for shares for disposals.

• Between 6 April 2014 and 29 October 2018.
• Between 29 October 2018 and 5 April 2019.
• On or After 6 April 2019.