What is Business Asset Disposal Relief?
If you are selling complete or a part of business, you might be eligible for a tax relief that allows paying only 10 percent as Capital Gains Tax on the profit. This tax relief is known as Business Asset Disposal Relief. It was known as Entrepreneurs’ Relief until 2020.
The lifetime limit on the profits to avail of this tax relief is set to £1 million. Without this disposal relief, you would be subjected to a 28 percent Capital Gains Tax on your profits.
What is the working of Business Asset Disposal Relief?
This tax relief can be availed by the company directors. Individuals or businesses can not apply to this tax relief. Capital Gains Tax is paid on the amount above the capital gains tax allowance. The tax is to be paid only on the percentage of your share in the business.
For instance, if you own 30 percent of the business and you want to sell your part of the business, you need to pay the Capital Gains Tax only on 30 percent of the profits.
You would have to pay a 10 percent capital gain tax if your profits in addition to the annual revenues are less than the basic rate tax band. Otherwise, the capital gains tax would be 20 percent.
If you are eligible to benefit from the Business Asset Disposal Relief, your tax would be significantly reduced to just 10 percent of your profits. However, only if the profit limit is within £ 1 million. Profits above the limit of £ 1 million are subjected to a 20 percent tax.
What is the Capital Gains Tax for Businesses?
The profit earned on selling complete or a part of the business is termed as Capital Gains Tax. A sole trader or a business partner of the company is subjected to pay the Capital Gain Tax.
Are You Eligible to Get Business Asset Disposal Relief?
Certain criteria should be met if you are selling or closing down your complete or a part of your business. These criteria are based on the previous two years of selling or closing down of your business which is referred to as the qualifying period. These criteria include
- You must have at least 5 percent of the business share capital of the business.
- You must have at least 5 percent of the voting share capital of the business.
- You should be a business partner, office holder, employee, or sole trader of the company.
- Your business has not exceeded the lifetime limit of profits i.e., £1 million.
- You must qualify the above criteria for at least the previous two years from the date of selling or closing down your business.
- The company must be a trading company at the time of its disposal.
You cannot avail of Business Asset Disposal Relief on Carried Interest Gains.
What Are the Criteria That Need to Be Met If You Are Selling the Company?
Certain criteria should be met to get the Business Asset Disposal Relief. These are as follows.
- The business in question must be owned by you for at least the qualifying period of two years.
- You must either be a business partner or the sole trader for the previous two years from the date of selling your business.
What Are the Criteria That Need to Be Met If You Are Selling the Shares of The Company?
There are certain criteria that are required to be met to get benefits from the Business Asset Disposal Relief. These are listed below.
- You must be an employee or an officer in the company.
- The shares of the company must be held for at least two years.
- The company should be involved in trading activities
If the company is no more a trading company, you can still qualify for the tax relief. You must, however, sell the shares within a duration of three years.
There are some additional conditions if you want to sell the shares of an Enterprise Management Incentive and receive the Business Asset Disposal Relief. These have been listed below.
- You must have held the shares after April 5, 2013.
- You must have bought the shares before the duration of a qualifying period of two years.
How Many Benefits Can You Get from Business Asset Disposal Relief?
Follow the steps to calculate how much could you benefit from the tax relief.
- Calculate the total gains by adding the values of all qualifying assets and reducing all the qualifying losses from it. This calculated value would be subjected to the Capital Gains Tax.
- Deduct the Annual Exempt Amount from the total value. This exempt amount is referred to as the tax-free allowance. The tax-free allowance is £12,300 for the company director and £6,150 for trusts.
- You would have to pay 10 percent tax on the total amount above this tax-free allowance.
Moreover, after closing the small business, one cannot indulge in a similar activity for at least a period of two years otherwise, HMRC will consider the profit as distribution of income. Then, you might be entitled to pay an additional dividend tax. This rule has been made to prevent someone from not paying the tax.
How to Apply for Business Asset Disposal Relief?
Contact Her Majesty’s Revenues and Customs (HMRC) if you want to apply for receiving the benefits from Business Asset Disposal Relief. You must also submit the self-assessment tax return to claim the tax relief easily. You can file the Section A of the Business Asset Disposal Relief Helpsheet. Moreover, you can apply for the same more than once.
How Much Capital Gains Tax You Would Need to Pay If You Do Not Qualify for Business Asset Disposal Relief?
If your business does not qualify for Business Asset Disposal Relief then
- The residential properties are charged at 28 percent on the profits as Capital Gains Tax.
- You would also be subjected to pay 20 percent on the profits made from other qualifying assets as taxes.
