View the related Tax Guidance about Entrepreneurs' relief
Business asset disposal relief for sole traders
Business asset disposal relief for sole tradersThis guidance note discusses the application of business asset disposal relief (BADR), previously known as entrepreneurs’ relief, for sole traders only. See also the following guidance notes:•Conditions for business asset disposal relief•Business asset disposal relief for partnerships•Business asset disposal relief on shares and securities•Maximising business asset disposal reliefFor further detail, see Simon’s Taxes C3.1302C–C3.1303A.OverviewTo be eligible for business asset disposal relief, a disposal must be:•a material disposal of business assets•an ‘associated disposal’ where an asset is disposed of which is associated with a relevant material disposal’ eg where an asset is owned personally but used for the purpose of the business carried on by a company or partnership•a disposal of trust business assets, see the Business asset disposal relief (entrepreneurs’ relief) ― trusts guidance noteTCGA 1992, s 169HHowever, only the first option is applicable to sole traders. An associated disposal can only take place where there is a material disposal which consists of a disposal of an interest in a company or partnership, so the second option is not available. The third option requires that the business is owned by a trust. For sole traders, there is a material disposal of business assets where the trader:•disposes of whole or part of their business, or•disposes of business assets on or after cessationTCGA 1992, s 169I(2)A disposal for these purposes is any kind of disposal that gives rise to a capital gain. BADR is not just
Business asset disposal relief (entrepreneurs’ relief) ― trusts
Business asset disposal relief (entrepreneurs’ relief) ― trustsEntrepreneurs’ relief (now called ‘business asset disposal relief’) is a relief that reduces the rate of capital gains tax payable by business-owners on a disposal of their business. Trustees are able to claim the relief on the disposal of business assets held by them in the same manner that individuals can.The relief was introduced on 6 April 2008 as ‘entrepreneurs’ relief’ and it retained that name until 6 April 2020. The structure of the relief has remained substantially the same throughout the period, although there have been changes to qualifying conditions and the lifetime limit, which are mentioned in this guidance note. The relief is now referred to throughout as ‘business asset disposal relief’. Gains that qualify for business asset disposal relief are subject to capital gains tax at the rate of 10% whereas other trust gains are subject to tax at the higher capital gains rates of 20% or for residential property 28% to 5 April 2024 and 24% thereafter. The preferential rate of tax means that the relief could be very valuable to a trustee planning a disposal of any assets that potentially qualify as business disposals.There is no provision that would permit personal representatives to qualify for business asset disposal relief.As noted above, the conditions for claiming the relief are broadly very similar to those applicable to an individual, but there are some significant differences that a trustee specifically has to consider when planning a disposal. These are discussed
Business asset disposal relief for partnerships
Business asset disposal relief for partnershipsThis guidance note discusses the application of business asset disposal relief (BADR) for partners only. BADR is a capital gains tax relief which reduces the rate of tax on qualifying gains to 10%.BADR relief is available for individuals whether they operate as a sole trader, in partnership or through their personal company. Companies cannot claim BADR. There is a lifetime limit on BADR of £1m of total capital gains.The rules for sole traders are the same as those for partners and there is more detail in the Conditions for business asset disposal relief guidance note. The commentary below sets out how these rules apply to partners in partnerships.For further guidance on BADR and partnerships, see Simon’s Taxes C3.1302C–C3.1303A and HMRC guidance in CG63950P onwards.Overview of business asset disposal relief for partnershipsTo be eligible for BADR, a disposal must be one of the three main categories as follows:•a material disposal of business assets which applies when the business or part of the business is sold with modifications when the business has stopped trading•a disposal that is associated with a material disposal which means assets used in the trade of the partnership but held by the partner personally, these are known as the associated disposal rules. For this to apply the individual must also make a disposal of their own interest in the business, though it need not be their entire stake, or•a disposal of trust business assets, ie the business is owned
Conditions for business asset disposal relief
Conditions for business asset disposal reliefBusiness asset disposal relief (BADR), which was previously known as entrepreneurs’ relief, is a capital gains tax (CGT) relief that allows business owners with chargeable gains on qualifying business assets to pay CGT at a rate of 10%. For disposals made on or after 11 March 2020, the relief is available on up to £1m of capital gains for each individual over their lifetime; prior to 11 March 2020, the lifetime limit was £10m. This reduction in the lifetime limit was in FA 2020 and is detailed further below.Relief is available on gains arising to sole traders, partners, shareholders and trusts; it is not available for companies. The relief also applies to gifts and non-arm’s-length sales.This guidance note sets out the main qualifying conditions for BADR, how the relief is calculated and claimed, and details on associated disposals.HMRC guidance is set out at CG63950P and the relevant legislation can be found in TCGA 1992, ss 169H–169SH.Disposals qualifying for business asset disposal reliefBADR applies to qualifying business disposals which fall into three main categories:•material disposal of business assets ― this is the main type of disposal which will attract BADR. It applies to individuals who trade through a company, as a sole trader or in a partnership. Relief will be available if part or the whole of the business is sold and the relief is modified when the business has ceased trading•disposal of trust business assets where business assets are held by the
Business asset disposal relief (previously known as entrepreneurs’ relief)
Business asset disposal relief (previously known as entrepreneurs’ relief)Business asset disposal relief (which may also be referred to as BADR) is a capital gains tax (CGT) relief available to taxpayers who make a qualifying business disposal (essentially selling or giving away their business). Gains qualifying for business asset disposal relief are taxed at a flat rate of 10%. Relief is available on up to £1m of capital gains for each individual over their lifetime. Prior to 6 April 2020, business asset disposal relief was known as entrepreneurs’ relief. Strictly, any reference to the relief before 6 April 2020 in the commentary below should use the term entrepreneurs’ relief, however to avoid confusion, the term business asset disposal relief has been used throughout. Business asset disposal relief is a key relief in many business scenarios. To read about it in the context of some common types of transactions, see the following guidance notes:•Rollover relief•Business asset gift relief ― restrictions•Capital gains tax implications of incorporation•Tax implications of share sale•Tax implications of trade and asset sale•Takeovers•Loan notes and Qualifying Corporate Bonds (QCBs) and non-QCBs•Tax treatment of earn-outs and deferred consideration•Enterprise investment scheme deferral relief•Informal winding upIn most instances, business asset disposal relief will be available to:•sole traders and partners selling / gifting the whole or part of their businesses (furnished holiday lettings are also included)•company directors and employees holding at least 5% of the ordinary shares and voting rights in
Tax legislation doesn't stand still, and neither should you. At Tolley we're constantly building tools to give you an edge, save you time and help you to grow your business.