BADR is a capital gains tax (CGT) relief intended to incentivise individuals to grow and invest in their businesses by reducing the rate of CGT to 10% on material disposals of business assets that fall within a taxpayer’s lifetime allowance.
To qualify for BADR, assets must have been owned for the two-year period ending on the date of disposal and fall within one of the categories below.
What is meant by the disposal of a whole business is clear but where only part of a trade is disposed of, that part must be capable of being carried out in its own right if it is to qualify for BADR.
In the case of a sole trade, it routinely the case that there is a delay between the cessation of the business and the disposal of assets used in that business, and so provided the asset is sold within three years of the date of cessation, the BADR qualifying conditions will not be breached.
For this purpose, a trading company is one where any investment activity is not undertaken to a substantial extent. HMRC will consider whether there are substantial non-trading activities in the round such that this test will be applied to criteria such as turnover, asset base, management time and expenditure. A company is a personal company if the taxpayer is an employee or director and the shareholding criteria are met. This is discussed in key changes section below.
Please note that there is no requirement for the personal company tests to be met by shareholdings acquired under an Enterprise Management Incentive scheme.
The effect of the March 2020 rule change is that gains realised after 10 March 2020, which would otherwise qualify for BADR, would only benefit from the reduced 10% tax rate to the extent that a taxpayer’s historic claims for the relief were less than £1 million.
This significant reduction will have inevitably caught some people out, with the result that they are now in the position of owing an additional 10% tax plus late payment charges on the capital gains realised.
For reference the lifetime limits in force for earlier years were:
Taxpayers who have received a letter from HMRC need to review their historic BADR claims and, where total claims in excess of the £1 million lifetime allowance are identified in the year to 5 April 2022, they will need to amend their 2021/22 Self-Assessment Tax Returns to remove or reduce the BADR claim to the lifetime limit of £1 million.
If a taxpayer believes that the letters have been sent in error, they need to contact HMRC and explain their position.
Failure to take any action by the date noted in the letters may result HMRC opening an enquiry or amending the 2021/22 tax return.
Shareholders whose holding has been diluted below 5% as a result of commercial fundraising should take advice on whether a dilution election should be made.
Shareholders who otherwise do not qualify for BADR should take advice on whether Investors’ Relief applies to their circumstances, which can also secure a 10% tax rate when the qualifying conditions are met.
Should you need any assistance in this regard or any other matter pertaining to whether your circumstances qualify for a BADR claim, please contact us on either email@example.com or 0121 726 1717.
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