What is Business Asset Disposal Relief, how can you benefit from it and what are the 2020 changes?
Business Asset Disposal Relief is a tax relief that the seller of a business can benefit from on sale. This relief was known as Entrepreneurs Relief until 6th April 2020. It is a great incentive set up by the UK Government to encourage people to set up a business, put time and energy into building it and then reward them for their hard work once they are ready to sell it. This has a lifetime limit of £1m per person and there are certain rules that must be applied to ensure you qualify. In this blog we will cover the basics of what entrepreneurs’ relief is, how to claim it and the changes made to the scheme in March 2020. What is Business Asset Disposal Relief? When you are ready to sell your business, Business Asset Disposal Relief / Entrepreneurs Relief can benefit you by allowing you to do this at a reduced tax rate. If, when you sell your business, you make a financial gain, you will pay Capital Gains tax to which the following will be relevant:
Everybody has an annual personal tax-free allowance, which at the time of writing (July 2020) is £12,300. This means for the first £12,300 of gain, you will pay no tax.
You may be able to offset any business losses, or losses in the value of an asset against your ‘gain’ so you pay less tax.
You pay tax on your portion of the gain. That means if you own 50% of the business, you will be liable to tax on your 50% of the gains.
You will usually pay tax on the gain (that is, the gain less any allowances in losses) if that gain is above the personal tax-free allowance. You only pay tax on the element that is above your personal tax-free allowance.
If, when you add the gain to your annual earnings, the combined amount is greater than the basic rate income tax band, you will pay 20% tax, otherwise it’s 10%. This does not apply to the sale of residential properties.
If applicable, Business Asset Disposal Relief or previously Entrepreneurs’ Relief will reduce your tax payable to 10%.
How does Business Asset Disposal Relief work? As mentioned above, this allows you to apply a reduced rate of 10% capital gains tax on the profits you make when selling qualifying assets. Note that entrepreneurs’ relief is available only to individuals, not businesses. And, you can only claim up to £1m in your lifetime. Can you claim Business Asset Disposal Relief more than once? Yes, you can claim Business Asset Disposal Relief more than once, given that it stays within the lifetime limit of £1m. Any gains that exceed the £1m lifetime tax allowance will go back to being taxed at 20%. Can I claim Business Asset Disposal Relief? There are a few pieces of criteria you need to meet to be eligible for Business Asset Disposal Relief. These include the following:
You are an employee or office holder of a limited company or the sole trader or business partner
You haven’t already exceeded the lifetime cap of £1m
You have held 5% or more of the business’s share capital and 5% of the voting share capital
You need to have met the qualifying period: this is two years with the end date being the date of the share disposal
All of the above points must have been met within the past two years. Has entrepreneurs relief been scrapped in 2020? In March 2020, Chancellor Rishi Sunak announced that a change was to be made to the lifetime cumulative allowance. This would mean that the previous £10m lifetime gains would face a steep cut of 90%, being reduced down to just £1m lifetime gains being available to an individual. This was a very controversial decision which many said would be likely to discourage people from creating start-ups. The reason this decision was made was to save £6bn to the Treasury over the next five years. So, in answer to this question, no, entrepreneurs' relief has not been scrapped – it has been re-engineered, and the key change was the reduction from £10m lifetime gains being reduced to £1m. As mentioned previously, the name also changed to Business Asset Disposal Relief as of this April. Why was Business Asset Disposal Relief introduced? As discussed earlier, the scheme was introduced to reward business owners for spending time building a business and creating employment opportunities. This was originally introduced by Gordon Brown back in 2008. Since then, there have been many changes to the lifetime limit, as follows:
In March 2010, the relief was £2 million
By June that year, it was raised further to £5 million
This was then doubled to £10 million in March 2011
In March 2020 this faced a 90% cut, going down to just £1 million.
What are the benefits of Business Asset Disposal Relief? As we’ve established, the main benefit of Business Asset Disposal Relief is reducing your Capital Gains Tax from a potential 20% down to 10%, meaning you keep more of the profits or gains. How to calculate Business Asset Disposal Relief You can calculate Business Asset Disposal Relief in five easy steps:
Add together the capital gains (what you sold shares/assets for)
Deduct any losses
Work out the total taxable gain eligible
Take away your Capital Gains personal Tax-free allowance
If you qualify for Business Asset Disposal Relief, you will only pay 10% tax on what is remaining.
How to claim Business Asset Disposal Relief Claiming Business Asset Disposal Relief must be done through HMRC. The most common way to do this is by submitting a claim on your annual self-assessment tax return. This must be made before the first anniversary of the 31 January following the end of the tax year in which the relevant tax disposal takes place. Unfortunately, it can be easy to get caught out of being granted Business Asset Disposal Relief on a technicality that has been glossed over. Seeking advice from an accountant is recommended to help you to avoid this. Due to the huge financial interventions of the Government during the Coronavirus pandemic, we believe that Business Asset Disposal Relief will be further altered to save the Exchequer money in the future and as a way to claw back some of the billions of pounds the Government has pledged by way of interventions during the pandemic.