Selling the shares of a UK business can be quite a complicated process which will often result in the seller making a gain on those shares (called a ‘capital gain’). This capital gain is ordinarily subject to tax (unsurprisingly called ‘capital gains tax’) which is applied to the gain made once an individual’s relatively modest annual exemption has been taken into account.
However, a relief is available which can reduce the effective rate of tax payable on capital gains. This relief was previously known as Entrepreneur’s Relief (ER) and has since 2020 been renamed as Business Asset Disposal Relief (BADR).
Up until 2020 the effective rate of tax that ER provided for on capital gains was 10% which could be applied to a maximum lifetime allowance of £10m of gains on qualifying assets against a normal rate of 20%. This £10million lifetime threshold was reduced to £1million on disposals from 11 March 2020, reducing the benefit of this relief, as any pre 11 March 2020 disposals are factored into this new, reduced lifetime limit.
BADR Conditions to Qualify on sale of shares
There are some peculiarities but generally speaking, to benefit from BADR when selling shares in a company, the following criteria must be satisfied during the two years prior to any sale:
The company in question must be a trading company or the holding company of a trading group; and
You must have been either a director, officer or employee of the company; and
The company must be a ‘personal company’ which means you must have held at least 5% of:
as well as being entitled to at least 5% of either:
How long will BADR last?
Since the reduction in the lifetime allowance the maximum value of the relief, i.e. the maximum tax saving, is now £100,000 per person. However, it has long been speculated (particularly given their approach to this relief and other business associated reliefs to date) that the government will seek to eventually abolish the relief in an attempt to save the Treasury many billions in lost revenue each year. This could be seen as any easy win given that it is widely seen as a relief that benefits only a tiny percentage of the population and who are also generally regarded as some of the wealthiest.
In November 2022 Chancellor Jeremy Hunt admitted that everyone will have to pay more tax! In 2020 when the then chancellor, Rishi Sunak, reduced the lifetime limit from £10million to £1million he labelled BADR as “expensive” “ineffective” and “unfair”.
The long and short of it is that this is all speculation, but with an ever increasing deficit, soaring energy prices and the highest levels of inflation for many years, it certainly wouldn’t be a surprise if BADR was once again squarely in the Treasury’s sights in the run up to the next budget, whether as a further tightening or a complete abolition.
If you would like to speak to someone about selling your business please speak to the experienced Corporate Law team at Ansons Solicitors by contacting either Neil Jones on 01543 431184 or Jamie Gill on 01543 431185 or by emailing firstname.lastname@example.org or email@example.com.
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