On closure of a company, retained reserves (net profit after the payment of Corporation Tax) in a company can be distributed as a “capital distribution”. The owners of small businesses may be entitled to Business Asset Disposal Relief (BADR) – previously called entrepreneurs’ relief – when they sell or close down their business.
What does BADR do?
The relief delivers a 10% tax rate for up to the first £10 million of lifetime capital gains. Individuals will be able to claim relief for gains made on multiple occasions up to a cumulative total of £10 million. Gains in excess of the £10 million lifetime limit will attract the standard rate of Capital Gains tax.
How do I qualify for BADR?
To qualify for relief, the following must apply:
- You have owned the shares in your limited company for at least 2 years before the date you sell it
- You have owned at least 5% of the shares and voting rights for that prior 2 year period
- You must also be entitled to at least 5% of either:
- profits that are available for distribution and assets on winding up the company, or
- disposal proceeds if the company is sold
- You’re an employee or office holder of the company (or one in the same group)
- 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
If the number of shares you hold falls below 5% because the company has issued more shares, you may still be able to claim BADR. Please speak to us for further guidance on this.
Very simply, if you dissolve a company with £100,000 of reserves, the gain would be £99,999, as the initial share has a value of £1 on entry into the company. Each shareholder would be entitled to their annual CGT allowance, currently £12,000 for 2019/20. The remainder of the gain would be charged to tax of 10% payable by the individual taxpayer.
On 6 April 2016 changes came into effect that were designed to prevent business owners from gaining unintended tax advantages. Specifically, where one business is closed and the assets are distributed at the lower rate of tax, i.e. 10% due to BADR and then a substantially similar business is started shortly afterwards. Therefore, please be aware of this rule if you are thinking of going back into contracting within 2 years, particularly if it’s within the same trade.
If you decide to start contracting again on these circumstances, then we may need to show the funds on closure as dividend income and apply your marginal rate of income tax, rather than a capital distribution that is taxed at only 10%.
Can I still claim if my company stops trading?
If the company stops being a trading company and becomes dormant for example, you can still qualify for relief if you sell your shares within 3 years.
How to claim relief
You can make a claim on the Capital Gains supplementary pages of your Self-Assessment Tax Return.
For an asset sold in the 2019/20 tax year, the deadline for claiming BADR will be 31 January 2022.
This blog is to provide general information and we recommend you speak to one of our tax advisors for further clarification. If you do not already have an accountant, please get in touch with us and we will be happy to provide advice.