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Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief

Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief prior to April 2020, is a tax relief scheme which allows for a reduced rate of Capital Gains Tax (CGT) to be paid upon the sale or solvent liquidation of a limited company. Those who qualify for Business Asset Disposal Relief pay just 10% CGT on qualifying gains (rather than the standard rate of 20%), up to a lifetime limit of £1 million.

Originally intended to reward success and encourage entrepreneurs to set up in business, the scheme has become increasingly controversial in recent years with many calling for a rethink on how Business Asset Disposal Relief is handled. Worth an estimated £2.4bn to directors last year, questions are being asked as to whether this is a suitable use of government funds and is often subject to speculation ahead of the annual Budget.

How does Business Asset Disposal Relief/Entrepreneurs’ Relief work?

Business Asset Disposal Relief is available to sole traders, company directors, and partners who sell or otherwise dispose of the whole or a part of a trading business. Individuals must have at least a 5% shareholding in the company in order to be able to claim. 

In order to have a valid claim for Business Asset Disposal Relief, these above conditions must have been met for at least 24 months leading up to the disposal; the company must also have traded during this time.

Business Asset Disposal Relief can be claimed when the business, or part of it, is sold to another party; the company is placed into a solvent liquidation process; or as part of a restructuring of a company’s shareholding. This scheme can only be used if the company enters a formal liquidation process, or if the company is sold; if the company is dissolved or struck off using a DS01 form, BADR cannot be claimed.

Business Asset Disposal Relief and Members’ Voluntary Liquidation (MVL)

Many owner-managed SMEs find there is simply no one willing or suitable to pass the company on to when the time comes for them to leave the business either due to retirement or a desire to move on. In these instances, directors may choose to place the company into a formal liquidation procedure known as a Members’ Voluntary Liquidation – or MVL.

MVLs are a formal way for solvent companies to formally bring an end to a company which is no longer required while extracting the proceeds in a tax-efficient manner. MVLs are generally suitable for companies with in excess of £25,000 to distribute to shareholders.