On 30 October 2024, the Chancellor of the Exchequer announced a series of tax increases and reforms.
One of the more significant changes for individuals looking to sell their business is the forthcoming increase in the Business Asset Disposal Relief (BADR) rate, which will take effect from 6 April 2025, in line with the end of the current tax year.
Our Corporate Solicitors explore the changes taking effect from April.
What is BADR?
BADR, previously known as “Entrepreneurs’ Relief,” is a tax relief that allows a reduced rate of Capital Gains Tax (CGT) to be applied to the chargeable gains made when disposing of certain business assets.
As such assets include shares in trading companies or in holding companies of trading groups, BADR is a useful relief for business owners when the time comes for them to sell their business.
Conditions of Business Asset Disposal Relief
If you are selling your business (either in whole or in part), the following principal conditions must have been met for at least two years prior to the sale date for BADR to be available:
- You must own a trading business as a sole trader or a business partner; and
- You must have owned the business for at least two years.
On the other hand, if you are selling shares or securities, the below conditions must have been met for the preceding two years:
- The company’s main activities are trading (as opposed to investment), or it is the holding company of a trading group.
- You are an employee or office holder (i.e. director) of the company;
- You own 5% or more of the ordinary shares and voting rights in the company; and
- You are entitled to at least 5% of either:
- The profits that are available for distribution and assets on a winding up of the company; or
- The disposal proceeds if the company is sold.
However, you should seek advice from a tax adviser to ensure that you and your business meet the qualifying criteria and that other rules apply if the shares being sold are under an Enterprise Management Incentive (EMI) scheme.
What changes are being made?
As it stands, when disposing of qualifying business assets, a seller will pay CGT at a reduced rate of 10% on the first £1 million of gains on qualifying assets, as opposed to the basic or higher rates of CGT, which are 18% or 24%, respectively.
If you sell your shares or business for over £1 million, any amount above this threshold would be taxed at either the basic or higher rates of CGT.
Similarly, BADR carries a cumulative lifetime limit of £1 million on qualifying gains; the government confirmed in the Autumn Budget that the lifetime limit will remain at £1 million.
However, from 6 April 2025 to 5 April 2026, the BADR rate will increase to 14%, and from 6 April 2026 onwards, it will increase further to 18%.
Contact Our Corporate Lawyers
Only a short timeframe remains to take advantage of the current BADR rate before the new rate of 14% takes effect on 6 April 2025, especially if the final documentation is yet to be drafted regarding any sale.
Therefore, if you are looking to sell shares or your business soon, and it makes sense for you to do so, it may be worth acting now to avoid not only having to pay a greater amount in tax but also having to rush negotiations and potentially make excessive concessions to a buyer to meet the April deadline.
Contact our Corporate Team on:
01619414000
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