Maximizing BADR Benefits Before Upcoming Changes

Understanding Business Asset Disposal Relief (BADR)

Business Asset Disposal Relief (BADR) offers a valuable tax advantage, reducing the capital gains tax rate on profits made from selling all or part of a business or shares in a personal trading company. Previously known as Entrepreneurs’ Relief, this relief is crucial for business owners looking to minimize their tax liabilities upon disposal.

Eligibility Requirements

To qualify for BADR, a sole trader must have owned the business for a minimum of two years before the sale date. This condition also applies if the business is closing and its assets are being sold, provided the assets are disposed of within three years after cessation.

For shareholders, BADR is available when disposing of shares or securities in a personal company that is either a trading company or the holding company of a trading group. A personal company must have a shareholder owning at least 5% of the ordinary share capital, with corresponding voting rights, profit entitlements, and distributable assets upon winding up.

Lifetime Limit on Gains

The reduced capital gains tax rate under BADR applies only to gains up to a lifetime limit of £1 million. This limit is individual for spouses and civil partners.

Current and Future Tax Rates

For the 2024/25 tax year, gains eligible for BADR are taxed at a favorable rate of 10%. Before 30 October 2024, the BADR rate was aligned with the standard capital gains tax rates, but recent changes have increased the tax rates on other gains. As a result, BADR now offers a significant advantage, reducing the tax rate by up to 14% compared to the higher capital gains tax rate.

However, this benefit is time-sensitive. To access the 10% rate, the disposal must occur before 6 April 2025. From 6 April 2025, the rate will increase to 14%, and from 6 April 2026, it will rise further to 18%, matching the capital gains tax rate for gains within the basic rate band.

Optimal Timing for Disposal

Timing is crucial for maximizing BADR benefits. Disposing a business or shares in a personal trading company on or before 6 April 2025 ensures access to the 10% rate. If a disposal is planned and the qualifying conditions are met, consider accelerating the disposal to benefit from the lower tax rate. For businesses that have already ceased operations, disposing of assets before 6 April 2025 will also minimize the capital gains tax payable.

If a pre-April 2025 disposal is not feasible, aim to complete the disposal before 6 April 2026 to benefit from the 14% rate, rather than the 18% rate. Unincorporated landlords exiting the furnished holiday lettings business may also consider advancing their plans to take advantage of the 10% rate before the favorable relief expires.

Conclusion

Proper timing and planning are essential to benefit from BADR and minimize capital gains tax liabilities fully. Business owners and shareholders should assess their disposal plans and consider accelerating them to take advantage of lower tax rates.

Partner Note: TCGA 1992, Pt. V, Ch. 3 (ss. 169H – 169SA).

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