This article was first published by Bluebox.
For many entrepreneurs, a share sale is a culmination of many years of hard work and perseverance, and they will want to ensure that as much of the reward for this as possible ends up in their hands (i.e. that the tax bill on disposal of the business is kept to a minimum).
Therefore, it’s vital for those selling shares in their business to consider whether Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, will be available.
BADR can reduce a seller’s capital gains tax rate to 10% (down from the usual rate of 20%) in respect of the first £1 million of their lifetime qualifying capital gains – offering potential tax savings of up to £100,000. As such, it’s important to know if and how it can be utilised, and how to avoid any potential pitfalls.
BADR may be available on the disposal of shares (or securities) of a trading company (or the holding company of a trading group) if the seller has, for the two years leading up to the disposal:
Points 2 and 3 together are known as “the 5% tests” and do not apply if the shares being sold were acquired after 5 April 2013 under an EMI option. In such cases, the EMI option must have been granted at least two years prior to the date of disposal of the shares. If that is the case, there is no minimum shareholding, nor any minimum holding period in respect of the shares themselves.
This article focuses primarily on the applicability of BADR on a share sale but BADR may also be available in connection with the disposal of the whole or part of a business carried on either by a sole trader or in partnership.
Given that the conditions detailed above must be satisfied for the entire two-year period prior to disposal of the business, if you are intending to sell your business at any point in the next few years, we recommend instructing an adviser to review your entitlement for BADR relief and planning for BADR compliance sooner rather than later.
Even once a structure is put in place which is BADR-compliant, it is important to bear these conditions in mind at all times until the business has been sold, to ensure this valuable relief is not lost.
BADR will not apply automatically upon a sale, even if a seller meets the required conditions. Instead, it must be claimed on an individual’s tax return on or before the first anniversary of the 31 January following the tax year in which the share disposal occurs. So, for a share disposal in the tax year 2024-2025 (ending on 5 April 2025) a claim must be made by 31 January 2027.
Failure to comply with the conditions outlined above throughout the two-year period leading up to payment of sale proceeds can lead to loss of the relief.
Common pitfalls include but are not limited to:
Given the value of this relief and the potential pitfalls which can prevent its application, it is key to work with advisers who understand the BADR rules, both well in advance of, and during, the sale process.
Fox Williams is a full-service commercial law firm, advising on matters such as corporate transactions, restructurings, tax, employment, IP and more, and can provide advice on BADR in the context of, or in preparation for, a share sale in addition to other legal aspects of the sale. If you would like more information, please contact Emma Bailey, Head of Tax at Fox Williams (EBailey@foxwilliams.com) or Stephanie Tsang, Corporate Senior Associate at Fox Williams (STsang@foxwilliams.com).
[1][1] In this context, (i) there is no minimum working time requirement for employees or officers; and (ii) non-executive directors and company secretaries, as well as executive directors, count as officers.