by Muhammad Shahid Aziz
If you’re thinking of selling your business or business assets, Business Asset Disposal Relief (BADR) can help you save on taxes. BADR offers business owners a lower Capital Gains Tax (CGT) rate. Let’s break down how it works, who qualifies, and how much you can save.
What is Business Asset Disposal Relief (BADR)?
BADR, previously known as Entrepreneurs’ Relief, allows you to pay a lower tax rate on gains when you sell assets tied to your business. Normally, when you sell assets, you pay CGT based on your tax rate (18% for basic rate, 24% for higher rate). BADR reduces this rate to 10% on qualifying assets, though this rate is set to increase over the next few years:
- Currently: 10%
- April 2025: Rising to 14%
- April 2026: Rising to 18%
CGT Allowance
Each year, you have a CGT allowance—an amount you can gain tax-free on asset sales. This was recently reduced to £3,000.
Who Qualifies for BADR?
BADR is for people who own businesses or business assets and have an active role in them.
Here’s who’s eligible:
- Sole traders, partners, or shareholders with at least 5% ownership in the company.
- You need to have held the asset for two years before the sale.
Some people don’t qualify, like:
- Passive investors with no active business role
- Employees without significant shareholding in the business
- Owners of assets that aren’t directly used in business
There’s also a £1 million lifetime limit, meaning you can apply the lower BADR rate to up to
£1 million in gains over your lifetime.
Tax Savings: Examples
Let’s compare BADR to regular CGT and dividend tax, using two examples.
Example 1: Higher-Rate Taxpayer with £80,000 in Gains
1. CGT Allowance: £80,000 – £3,000 = £77,000 (amount you pay tax on) 2. BADR Rate (10%): £77,000 * 10% = £7,700
3. Standard CGT Rate (24%): £77,000 * 24% = £18,480
4. Dividend Tax (33.75%): After a £500 dividend allowance, £79,500 * 33.75% = £26,831.25
Savings with BADR:
- Compared to regular CGT: Saves £10,780
- Compared to dividend tax: Saves £19,131.25
Example 2: Basic-Rate Taxpayer with £40,000 in Gains 1. CGT Allowance: £40,000 – £3,000 = £37,000
2. BADR Rate (10%): £37,000 * 10% = £3,700
3. Standard CGT Rate (18%): £37,000 * 18% = £6,660
4. Dividend Tax (8.75%): After a £500 allowance, £39,500 * 8.75% = £3,456.25
Savings with BADR:
- Compared to regular CGT: Saves £2,960
- Compared to dividends: Slightly higher (£243.75 difference)
How to Claim BADR on Your Tax Return
If you’re eligible for BADR, you can claim it when filing your tax return. Here’s how:
- Complete the SA108 Form: This form is part of the self-assessment return and is used for reporting capital gains.
- Enter BADR Information:
– Describe the asset, list sale and purchase dates, and note any allowable costs.
- Claim the 10% Rate: In the ‘Reliefs’ section, check the box to claim BADR and apply the reduced tax rate.
- Submit and Keep Records: Submit your tax return and keep proof (like purchase receipts and sale agreements) for HMRC.
In Summary
BADR is a valuable relief for business owners selling their business assets, offering a lower CGT rate than standard CGT or dividends. Basic-rate taxpayers may benefit more from dividends, but for higher-rate taxpayers, BADR can provide significant tax savings. With rates changing, timing asset sales may also maximize tax benefits. For questions, consult HMRC or a tax professional for guidance.