The Spring Budget 2020 announced a significant restriction on future availability of entrepreneur’s relief (ER) for individuals who dispose of all or part of their business, individuals who dispose of shares in their personal company, and trustees who dispose of business assets.
Broadly, the changes will increase the amount of tax payable by a business sold at a profit of over £1m. For potential sale profits at or around this limit, careful planning may be needed to extract value from the business prior to sale, for example through increased employer pension provision, to bring the chargeable gain within the revised limit.
The Spring Budget also announced that ER is to change its name to business asset disposal relief (BADR).
When an individual disposes of an asset at a gain, capital gains tax may be due. Ordinarily, for gains falling above the higher-rate threshold (£50,000 in 2020/21), this will be charged at a rate of 20%. However, if certain conditions are met, BADR may be available and the chargeable rate may be reduced to 10%.
Broadly, the lifetime limit of £10m is reduced to £1m for disposals on or after 11 March 2020. The measure also provides that the lifetime limit must take into account the value of ER claimed in respect of qualifying gains in the past. For disposals between 6 April 2011 and 10 March 2020, the lifetime limit on gains qualifying for ER is £10 million.
The £10 million limit is a lifetime threshold and claims may be made against it on more than one occasion.
Selling all or part of a business
To qualify for BADR, both of the following conditions must apply:
- the individual must be a sole trader or business partner; and
- the individual must have owned the business for at least two years before the date they sell it.
The same conditions apply if the business is closing rather than being sold. The business assets must be disposed of within three years to qualify for relief.
Selling shares or securities
To qualify, both of the following conditions must apply for at least two years before the shares are sold:
- the individual is an employee or office holder of the company (or one in the same group); and
- the company’s main activities are in trading (rather than non-trading activities like investment) or it’s the holding company of a trading group.
There are other rules depending on whether or not the shares are from an Enterprise Management Incentive scheme (EMI).
Selling assets previously lent to the business
To qualify, both of the following must apply:
- the investor sold at least 5% of their part of a business partnership or their shares in a personal company and
- they owned the assets but let their business partnership or personal company use them for at least one year up to the date they sold the business or shares – or the date that the business closed.