Where Business Asset Disposal Relief Falls Short

When you sell your business, you can expect to pay capital gains tax (CGT) on any gains your make.

Currently CGT is payable at 10% (if within your basic rate band for income tax) or 20% on such gains. But the 10% rate can also apply to gains of up to £10m if Business Asset Disposal Relief (BADR) applies. (BADR was previously known as Entreprenneur’s Relief until 6/4/2020).

To qualify for BADR the business must have been trading, and owned by the shareholder/proprietor selling, for at least two years before the sale date. A business is trading when most or all of its activities relate to a trade rather than to investments.

The focus for BADR is on the effort put in to produce the trading or investment income, rather than the proportion of turnover which is generated by the investments compared to the trade.

For example, a cash-rich company may receive much of its income from passive investments but the directors spend all of their time trying to drum up new sales leads. As long as the majority of the activities of the company (expenses and time spent) relate to the trade, the company will be considered to be trading even if most of the income arises from the passive investments.

By contrast, a company which owns a let property that the directors spend some time managing will not be considered to be a trading company unless there is some other activity within the company which can be classified as a trade. Letting a property is only regarded as a trade if there are considerable activities around receiving and catering for those who pay the rent.

Furnished holiday accommodation let on a commercial basis is regarded as a trade, as is a bed and breakfast business or a hotel. However letting an industrial unit is not generally treated as a trading activity.

If you are thinking of selling your business, ask us to check whether BADR will apply before you agree the terms of the sale.