This article sets out what Business Asset Disposal relief is and the key qualifying requirements.
Business Asset Disposal Relief is a tax relief that allows some business owners to pay a reduced amount of Capital Gains Tax when they sell or wind-up their business. The means that the Capital Gains Tax is paid at a lower rate of 10% instead of the usual 20% on up to £1m of lifetime gains. Capital Gains Tax is generally a lower percentage than Income Tax and there is a £12,300 tax-free individual allowance. The gain is calculated using the base cost of the shares.
It was introduced back in 2008 to encourage entrepreneurship and investment. Initially, the relief was unlimited, then reduced to £10m and in March 2020 to £1m.
It can apply if you sell or dispose of all or only a part of your business. To qualify, you must have owned the business two years prior to the disposal and dispose of the business assets within three years of ceasing to trade.
If the business was incorporated, the disposal will be by way of sale of shares or via a Members’ Voluntary Liquidation. To qualify you must have been an employee or officeholder of the company for the 2 years prior to the date you dispose of the shares and the company’s main activities must be trading (or it’s the holding company of a trading group).
The business must be a personal company. This means that you must have at least 5% of the shares and the voting rights. You must also be entitled to at least 5% of the profits.