Everything your clients need to know about using their Business Asset Disposal Relief

If you have clients who are looking to sell their business in the near future, they may be expecting to have to pay a hefty tax bill. This can take a significant chunk out of any potential profits they might expect.

Thankfully, this is where Business Asset Disposal Relief – formerly known as “Entrepreneurs’ Relief” – can help them. This relief can reduce the level of Capital Gains Tax (CGT) they have to pay when selling their business’ assets.

If you have clients who you think could benefit, read on to find out everything they need to know about using their Business Asset Disposal Relief.

Business Asset Disposal Relief can reduce the amount of CGT that your client pays

Business Asset Disposal Relief is a type of tax relief that can allow your clients to pay a reduced rate of CGT when they sell off part or all of their business. If they qualify for it, they can pay a rate of only 10% tax for the sale – significantly lower than the amount they would usually be charged, which is typically between 18% and 28%.

It’s also important to bear in mind that there is an upper limit for the amount they can claim relief on, and this lifetime allowance currently stands at £1 million. While it was reduced from £10 million in the chancellor’s 2020 budget, it can still reduce your client’s tax bill by a significant amount.

This relief is intended to give entrepreneurs a helping hand and let them keep a greater portion of their hard-earned rewards. However, in order to qualify for this relief, your client will need to meet certain criteria.

To claim relief when selling a business, your client must have owned it for at least 2 years

There are also several important differences to bear in mind depending on whether your client is selling shares or disposing of the entire company. While in both scenarios they can qualify for Business Asset Disposal Relief, there are some things they should be aware of.

If your client is selling their business in its entirety, then there are two main criteria that they have to meet:

• They must have owned the business for at least two years.

• They must have been a sole trader or business partner for that same qualifying period.

Please bear in mind that if your client is closing their business then they will need to dispose of any assets within three years in order to qualify for Business Asset Disposal Relief.

Your client must meet certain criteria when selling shares in a company

If your client is disposing of shares in their company, then they need to have met two criteria for at least two years.

While they don’t need to be an owner, they need to have been an employee or office holder of the company. Furthermore, the company’s main activities also need to be in trading, or to be the holding company for a trading group.

There are also some additional rules to bear in mind if your client is selling shares that came from an Enterprise Management Incentive (EMI) scheme.

If they are, then your client must have bought them after 5 April 2013 and have been given the option to buy them at least two years before selling them.

If they aren’t from an EMI scheme then, for at least two years before the sale, the business must be a “personal company” of the client. This means that they need to have at least 5% of both the shares and voting rights.

On top of this, they must also be entitled to at least 5% of either profits that are available for distribution or disposal proceeds if the company is sold.

If the amount of shares that your client holds falls below this 5% threshold due to the company issuing more shares, they may still be able to claim relief. If they are unsure whether they are still eligible, they may benefit from speaking to an adviser.

This relief can cut your tax bill by a considerable amount

For example, John Smith is a sole trader and sells his business in the  2021/22 tax year, which nets him £2 million in capital gains. As a higher-rate taxpayer, and assuming that he’s already used up his annual CGT allowance, he may be liable for a considerable tax bill.

Thankfully, since John meets the criteria mentioned above, he is able to apply for relief. This means that he only needs to pay 10% on the first £1 million, which is £100,000 in tax.

Now that he’s reached his lifetime allowance of £1 million, he has to pay the full amount of tax on the remainder of the gains. This would be 20% on the remaining million, so £200,000 in tax.

This means his total tax bill is £300,000, but he has saved £100,000 due to his Business Asset Disposal Relief.

Working with a professional can help to avoid any potential tax pitfalls

Business Asset Disposal Relief can be a useful way for your clients to keep a greater amount of the proceeds when selling their business. However, as you can see, it isn’t always straightforward to understand.

If your client wants to navigate the potential tax pitfalls of tax relief, they may benefit from speaking to a professional.

Not only can working with a financial adviser help your clients to save money, but it can also give them peace of mind to know that there won’t be any unexpected tax issues to deal with. This can enable them to enjoy the proceeds of their years of hard work without concern.

Get in touch

If you have clients who you think may benefit from Business Asset Disposal Relief and may want the reassurance of working with a professional, we can help. Email enquiries@prosserknowles.co.uk or click here to request a call back from one of our advisers.

Please note:

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.