There are various types of tax relief that are applicable to individuals or businesses. The companies and individuals are required to meet certain criteria to qualify for these tax reductions, but they are worth claiming as they could result in significantly lower taxes on business assets and profits.
One of the tax reliefs that individuals who own businesses can apply for is Business Asset Disposal Relief. Individuals who are eligible for the relief could end up paying less Capital Gains Tax on eligible assets if they meet the set criteria and apply for the reduction within the set timeline.
In this article, we'll look at what Business Asset Disposal Relief is, who can claim it and how it can be calculated.
What is Business Asset Disposal Relief?
Business Asset Disposal Relief, previously known as Entrepreneur’s Relief, is a type of tax relief that a sole trader or individuals in a limited company can use to claim a reduced tax rate on the profit made from the sale of their company. The Business Asset Disposal Relief reduced rate is 10%, which is lower than the rate of Capital Gains Tax, which currently has a standard rate of 20%. Business owners will only pay tax on the amount that exceeds the tax-free allowance for their Capital Gains. For the 2022/2023 tax year, the allowance amount is £12,300, the same as it was for the tax year 2021/2022.
For example, you may decide to sell your business and make a profit of £20,000, of which a portion is eligible for Business Asset Disposal relief. A profit of £20,000 would result in £770 tax at the reduced rate on the remaining £7,700, which is the amount above the tax-free allowance. This compares to £1,540 that you would have otherwise paid in Capital Gains Tax.
The tax relief is only available to individuals and cannot be claimed by a company. This means that the tax can only be claimed on the portion of the assets that are owned by a single individual. The profit that business owners and employees make from selling shares is also eligible for Business Asset Disposal Relief.
Who qualifies for Business Asset Disposal Relief?
Business owners and partners are eligible for Business Asset Disposal Relief if they have owned the company for at least two years before selling part or all of it. This also applies if they are closing the business.
In instances where individuals are selling shares or securities, they must have been an employee of the company for at least two years. The company's main activities must also be involved in trading, or it must be a holding company in a trading group.
Shares that are from an Enterprise Management Incentive (EMI) must have been bought after 5 April 2013, or individuals must have been presented with the option of buying them at least two years prior to their sale.
If the shares are not from an EMI, the business must have been a personal company, which means that they have at least 5% of voting rights and shares. Individuals must also have at least 5% entitlement to profits that are distributed, as well as disposal proceeds if the business is sold. However, if this percentage drops below 5% as a result of the company distributing more shares, it is still possible for them to be eligible for Business Asset Disposal Relief.
In instances where individuals are selling assets that they had lent to the company, they must have sold a minimum of 5% of their shares or part in the business partnership to qualify. They must also have owned the assets but allowed their personal company or business partner to use the assets for at least one year before the date that they sell them (or the business closes).
How can individuals claim Business Asset Disposal Relief?
Business Asset Disposal Relief can be claimed through Self Assessment tax returns, or by completing Section A on the Business Asset Disposal Relief helpsheet. There is no limit to how many times it can be claimed and business owners can claim a maximum of £1 million over the course of their lifetime.
Business owners can claim a reduced rate for the tax year that they sold or closed their business. The deadlines to claim Business Asset Disposal Relief are as followed:
- 31 January 2024 for the tax year 2021/2022
- 31 January 2023 for the tax year 2020/2021
- 31 January 2022 for the tax year 2019/2020
Business owners should contact HMRC if they sold assets before 11 March 2020 as they may be able to claim a reduced rate for previous tax years. The claim is usually made as part of an individual's Self Assessment tax return.
How is Capital Gains Tax calculated?
Capital Gains are the difference between the amount paid for an asset and the amount for which it was sold. Certain costs can be deducted from this calculation such as advertising fees, Stamp Duty Land Tax and VAT, and costs that were paid to improve the assets.
Costs that can’t be deducted include interest on a loan that was used to buy the asset or costs that can be claimed as business expenses. After calculating the cost of each asset, they should be added together to find the total qualifying gains from the assets, from which the total tax can be calculated.
Capital Gains are excluded from tax if the total taxable gains fall under the tax allowance. Business owners are still required to report their gains if they file Self Assessment or the total amount that they sold their assets for was more than four times more than their tax allowance.
How is Business Asset Disposal Relief calculated?
Business owners who qualify for Business Asset Disposal Relief can pay a reduced tax rate of 10% on the sale of their business assets. However, this will be a higher rate on gains that aren’t from business assets.
Gains that don’t qualify for Business Asset Disposal Relief will be subject to higher Capital Gains Tax rates. For example, gains from the sale of residential property will mean that business owners must pay Capital Gains Tax rates of 28%, whilst other chargeable assets that aren't eligible for the reduced rate have the standard tax rate of 20% of the gains.
Can couples claim Business Asset Disposal Relief?
Spouses and civil partners are separate individuals and can therefore make separate claims for a reduced rate. Partners are entitled to the maximum Business Asset Disposal Relief available for individuals, as long as they meet the relevant conditions for the tax relief.
Is Business Asset Disposal Relief available for trustees?
This reduced tax rate is available to some trustees, although it isn’t available to companies or trusts that have an entire discretionary settlement. It can be jointly claimed by trustees of a trading company alongside the qualifying beneficiary. The claim must be made to HMRC in writing before the first anniversary of the 31 January in the following tax year when the asset disposal took place.
For example, if the disposal took place during the tax year 2020/2021, the claim must be made before 31 January 2023. The claim can be amended or revoked if it is still within the time frame that the claim must be made.
Business Asset Disposal Relief allows individuals to pay tax at a lower rate, as the reduced rate is 10% of the asset profit rather than the 20% rate for Capital Gains Tax. Business owners pay tax on the amount that exceeds the tax-free allowance, which is currently set at £12,300. The tax relief reduced rate needs to be claimed by the 31 January of the following tax year.
Certain costs can be deducted from the sale of the business asset, such as Stamp Duty Land Tax and advertising fees, as long as they fit the tax requirements and thresholds. The profits from the sale of each asset must be added together to calculate the total capital gains from the business assets.