What is the replacement to Entrepreneurs Relief and how does it work?
What’s the background?
BADR is a relief for individuals which may be available for certain business disposals. It provides relief on Capital Gains Tax by charging the first £1million of qualifying gains at an effective rate of 10%.
The relief is available to individuals disposing of:
- Whole, or part, of a trading business owned by the individual either alone or in a partnership
- Shares in an individual’s ‘personal company’
- Assets which are used by a business or a company which has ceased within the previous three years
What are associated disposals?
Where an individual makes a qualifying disposal, there may also be availability of another relief relating to ‘associated disposals’. To qualify for this relief, the disposal of an asset must be:
- Used in a qualifying company or group of companies of the individual, or
- Used in a partnership, where the individual is a partner.
There may be restrictions in obtaining the relief on an associated disposal in specific situations. These include situations where a property is in personal ownership but is used in an unlisted company or partnership trade and generates rent. The availability of BADR is also restricted where rent is paid.
What is the period of ownership requirement?
The individual claiming BADR must have owned the disposed assets for a period of at least two years.
What are the other qualifying criteria for shareholders?
In order to qualify for BADR in the scenario that an individual is disposing of shares and/or assets in their personal company, the individual must:
- Be a company employee or office holder
- Hold at least 5% of the company’s ordinary share capital and
- Be able to exercise at least 5% of the voting rights.
For disposal on or after 29 October 2018, there are additional conditions which need to be satisfied:
- Distribution test – the individual must be entitled to at least 5% of the company’s profit available for distribution to equity holders and 5% of the assets for distribution to equity holders in the even that the company undergoes winding up; or
- Proceeds test – an individual is entitled to at least 5% of the proceeds in the event of a disposal of the entire ordinary share capital of the company.
Some additional considerations must be made as from 6 April 2019, shareholders whose shareholding are reduced below to qualifying level of 5% as a result of raising funds for commercial purposes may still be eligible for BADR through an election. The election will enable shareholders to crystalise a gain on their shares prior to the diluting event.
This would be enabled by treating the shareholding as if it had already been sold and re-purchased at the new market value. The election will need to be made in the individuals tax return for the year in which the dilution takes place. The shareholder also has the option of deferring the accrued gain until they decide to dispose their shares.
BADR is a concept which requires careful planning, but if you require some advice on this area please do not hesitate to get in touch with us on 0333 009 0801.