In March 2020, one of the headline-grabbing measures announced surrounded entrepreneurs’ relief. The relief was designed to be an incentive for entrepreneurs to start a new business by reducing the amount of capital gains tax payable when the time came to dispose of certain business assets.
This expensive relief cost the taxpayer around £2 billion a year and benefitted only a select few. Government statistics showed that three quarters of that cost went to just 5,000 business owners.
Armed with those statistics, the Chancellor Rishi Sunak tinkered with the existing relief and gave it the new name of Business Asset Disposal Relief.
The new name does not have any practical impact on how the relief operates. You still pay capital gains tax at 10% when you dispose of any qualifying assets in 2020/21.
There is no limit to the number of times you can claim the relief, however you can only claim up to £1 million of business asset disposal relief during your lifetime. Prior to the changes on the 11th March 2020, this figure was £10m.
If you have not previously claimed entrepreneurs’ relief, only the first £1m will qualify for the 10% with the rest of the disposal taxable at 20% in 2020/21.
Transactions, such as share reorganisations or company restructurings, that occurred between 6th April 2019 and 11th March 2020 might unintentionally be subject to the lower £1m lifetime limit.
Who Can Claim?
A number of conditions apply depending on which asset you are planning to dispose of. This could be all or part of your business, shares or securities in a trading company, or other assets you lent to the business.
To qualify on disposal of a business in 2020/21, you must be a sole trader or in a business partnership and have owned the business for at least 2 years.
If you plan to close your business, perhaps due to the financial implications of COVID-19, all business assets must be disposed of within three years to be eligible for the relief.
Three conditions apply when it comes to disposing of any shares or securities, for the 2 years leading up to disposal.
- The company’s main activities need to be in trading or it must be the holding company of a trading group
- You need to be employed by the company or hold an office within the company to qualify
You must also hold 5% of both the shares and voting rights, and be entitled to at least 5% of either the profits available for distribution plus the assets on winding up the company or the disposal proceeds if the company is sold.
Other eligibility rules apply if the shares are from an enterprise management initiative (EMI), although the 5% condition will not apply.
If the company ceases trading, you have to sell the shares within 3 years to be eligible for the relief.
When selling assets you lent to the business, you must sell at least 5% of your part of a business partnership or your shares in a personal company.
You should also have owned assets your business partnership or company used for at least 1 year prior to the date they were sold or the date the business ceased trading.
Claiming The Relief
Just like entrepreneurs’ relief, you can claim business asset disposal relief in your self-assessment tax return if the sale of your business or any qualifying business asset goes through in 2020/21.
If you are completing a tax return for the sole purpose of claiming this relief, you have a deadline of the first anniversary of 31st January following the end of the tax year in which you made the disposal. For disposals in 2020/21, that would be the 31st January 2023.
For any disposals of qualifying assets in 2020/21, you can complete a business asset disposal relief help sheet.
Disposals Before 2020/21
If your business was sold before 11th March 2020 you might be eligible for the previous £10m lifetime limit, you have a deadline of the first anniversary of 31st January following the end of the tax year in which you made the disposal. So, if you sold or closed your business in the 2018/19 tax year, you have until 31st January 2021 to claim the relief. Any profits arising from the disposal of qualifying business assets in 2019/20 have to be claimed before 31st January 2022 – etc.
For more information please contact the tax team at KJG on 0161 832 6221 or email [email protected].