Many company directors reach the decision to sell or close their business, whether it’s due to retirement or relocating abroad. Whatever the reason, there can be many tax advantages to closing or selling your business if it qualifies for Business Asset Disposal Relief which can save you a small fortune on your tax bill.
If you’re considering winding up your business, in this guide, Clarke Bell outline everything you need to know about Business Asset Disposal Relief in 2020, from who is eligible to how much you can claim.
What is Business Asset Disposal Relief?
Business Asset Disposal Relief, formally known as, Entrepreneurs’ Relief is a tax relief that allows you to sell all or part of your business or its assets whilst paying only 10% Capital Gains Tax on the profits you’ve made. This is compared to the 20% rate applicable to most other capital gains.
How much can you claim in Business Asset Disposal Relief?
The total amount you can claim in Business Asset Disposal Relief in your lifetime is £1 million. You are able to claim as many times as you like, but this must be within the £1 million limit.
How to qualify for Business Asset Disposal Relief
If you are selling all or part of your business, the following must apply for at least 2 years up to the date you sell the business in order to qualify for Business Asset Disposal Relief:
- You must be a sole trader, a business partner or employee of the company. In other words, you must be an individual, not a company. Under HMRC rules, to be classified as an employee or officer, there are no restrictions based on your salary or hours worked. What they do require is evidence of you working, whether that is a contract or payslip
- You have held 5% or more of the share capital of the company and 5% of voting share capital. This minimum of 5% must have been in place for at least 12 months prior to claiming
- You must have owned the business for at least 2 years
Things are slightly different depending on whether you are selling shares or are disposing of the business altogether. Although in both instances you can qualify for Business Asset Disposal Relief, you should be aware of the main differences between the two:
Selling the business
If you are selling all or part of your business:
- You need to be the sole trader or business partner for the duration of the qualifying period (2 years)
- You should have owned the business for at least 2 years
This is great news for company directors that wish to close their company through a Member’s Voluntary Liquidation as it allows them to do so in a tax efficient way.
In the case that you are selling shares, you don’t need to be the company owner. However, you must have been an employee or officer in the company. Moreover, you should have held the share capital for the whole qualifying period of 2 years.
Further to this, to claim on disposal of shares, your company needs to be a trading company and have traded in the qualifying period. To be a trading company, your main activities need to be in trading, as opposed to non-trading activities like investment.
If, however, the shares are from an Enterprise Management Incentive (EMI), they must comply to extra qualifying conditions in order to meet the requirements for an Business Asset Disposal Relief.
If shares are from an EMI, you must have:
- Acquired them after 5th April 2013
- Have been given the option to buy them at least 2 years before selling them
If you meet both these criteria, you may be able to claim Business Asset Disposal Relief for the disposal of EMI shares.
How does Business Asset Disposal Relief work?
When you sell assets from your business or dispose of your business altogether, you must pay Capital Gains Tax on the profits. However, with Entrepreneurs’ Relief, you are relieved of some of this tax. That’s why it’s such a great initiative for Entrepreneurs.
Capital Gains Tax applies to anything you sell if it is more than you bought it for. This is true for individuals and companies. For example, personal possessions worth over £6,000 are usually subject to Capital Gains Tax with some exceptions.
For companies, Capital Gains Tax is applied to any profit you make on the disposal of your assets.
How much is Capital Gains Tax?
You must pay Capital Gains Tax on your overall profit over your tax-free allowance of £12,000. On anything over this amount, Capital Gains Tax stands at 20%.
However, by claiming for Entrepreneurs’ Relief, you can reduce the amount of Capital Gains Tax you have to pay to just 10%. So, anything you gain from selling your business will be taxed at half the amount, a huge financial relief for business.
To work out how much you can save through Entrepreneur’s Relief, you can simply:
- Calculate your total taxable gain. Do this by adding together all your capital gains, taking away your losses
- Take away your tax-free capital gains allowance, this is £12,000 for individuals
- You will be left with a figure which you can deduct 10% off which you will pay in tax
How to claim Business Asset Disposal Relief
To claim for Business Asset Disposal Relief, you must contact HMRC. Usually, a claim is done on your annual self-assessment tax return.
You must claim for Entrepreneurs’ Relief at least 12 months from the 31st January following the tax year your business was sold.
Take the next steps with the help of Clarke Bell
If you decide to sell your business, whether that’s in the next few months or years, let one of Clarke Bell’s professional accountants or tax advisers help ensure you take full advantage of Entrepreneurs’ Relief whilst remaining compliant to your legal tax obligations.