Tax relief for the disposal of business assets allows company directors to sell their entire business and pay just 10% capital gains tax up to a limit of £1 million. You can find out more about Business Asset Disposal Relief and whether it could benefit you by reading on.
How does Business Asset Disposal Relief work?
Previously known as Entrepreneurs Relief, Business Asset Disposal 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. If you did not pay this Capital Gains Tax, you would have paid much higher rates. Without the tax relief, the rate of Capital Gains Tax would be as high as 28%.
What is the process?
A business loss, or a loss in the value of an asset, might be offset against the gain when disposing of an asset and calculating your gain, which can lower the amount of tax you owe. Gains over the Capital Gains tax-free allowance, which is £12,300 for the 2021/22 tax year, are only subject to tax. Furthermore, you will only pay tax on the part of the gain that you own. If, for instance, you own 50% of the company, you will only be taxed on 50% of the gains.
Your gain will be subject to 20% tax if you combine it with your annual earnings and the combined amount exceeds the basic rate income tax band. You will only pay 10% tax if the amount falls within the basic rate income tax bracket. By claiming Business Asset Disposal Relief, you may be able to reduce your tax payable to 10% up to a limit of £1 million, significantly lowering your tax bill.
Residential properties are not eligible for Business Asset Disposition Relief, and it is only available to individuals, not businesses. The lifetime allowance does not have to be used up in one claim, and you can claim it more than once up to the limit of £1 million. Gains exceeding this amount will be taxed at 20%.
How are the eligibility criteria determined?
For you to qualify for this tax relief, you must be selling all or part of your business, and you must have met the following criteria for at least the last two years before the sale:
- Your shares were more than 5% of the company’s share capital and you held more than 5% of the voting shares.
- As an employee, officer, or business partner of a limited company, or as a sole trader or business partner, you are responsible for filing tax returns.
- In order to qualify, you must have met the qualifying period, which is two years from the date of the share disposal.
- The lifetime cap of £1 million has not been reached already.
Selling the business
The following criteria apply if you’re selling your business in whole or in part:
- For the last two years, you must have owned the business.
- For the duration of the qualifying period, you must be a business partner or sole trader.
Shares for sale
When selling shares, you must be a company employee or officer, but you are not required to be the owner. Furthermore, you must have held the share capital for the two-year qualifying period.
It is necessary for your company to be a trading company in order to claim tax relief on the sale of shares. Trading should be the main activity, rather than investing, dealing in land or buildings, or dealing in stocks or shares.
To qualify for Business Asset Disposition Relief, you must also adhere to additional requirements if your shares come from Enterprise Management Incentive (EMI).
- Your shares must have been acquired after the 5th of April 2013
- At least two years before you sold the shares, you should have been given the option to buy them
What is the Business Asset Disposal Relief calculation?
If you follow these simple steps, you can calculate how much Business Asset Disposal Relief you could be eligible for:
- Determine your taxable gain (the value of your assets or shares sold)
- Subtract your losses
- Get rid of your tax-free Capital Gains Allowance, which is £12,300 per person
- The remainder of your business asset disposal will only be taxed at 10% if you are eligible for Business Asset Disposal Relief
What is Business Asset Disposal Relief?
To claim Business Asset Disposal Relief, you must contact HMRC. By submitting a claim on your annual self-assessment tax return, you are able to do this. Prior to the first anniversary following the end of the tax year in which the business was sold or the tax disposal occurred, you should make your claim.
For more information, contact your Account Manager
Best Bizz clients interested in more details about Business Asset Disposition Relief should schedule a call with their Account Manager, who will be happy to talk with them about this.
Send our team an email at firstname.lastname@example.org if you would like more information about our limited company accountancy service or how we can support you and your business. We also recommend completing the short form on our website and requesting a call at a time that is convenient for you.