BADR was known as Entrepreneurs’ Relief before 6 April 2020. This scheme provides a 10% discount to all CGT arising on qualifying assets. You can qualify for BADR if you are: Selling all or part of your business Selling shares or securities Selling assets you lent to the business Further details can be obtained from HMRC at the following link: Business Asset Disposal Relief - GOV.UK (www.gov.uk)

Business Asset Disposal Relief (BADR) or Entrepreneur’s Relief Advice

Q: What is Solvent Liquidation?

Where agreed by HMRC, in the above circumstances distributions to shareholders can qualify for Entrepreneurs’ Relief, i.e will be subject to Capital Gains Tax at as little as 10%. However, if within two years of a shareholder’s receipt of such a distribution that individual becomes involved in a trade or activity similar to that of the liquidated company, Entrepreneurs’ Relief will be rescinded and the distributions will be treated as fully taxable income.

Q: When is Solvent Liquidation applicable?

Upon the completion of the project which a company was formed to undertake, e.g the development and sale of property Where government or local community funding or contracts cease to be available for certain activities, e.g renewable energy projects, education for immigrants or those with learning difficulties or care for the elderly Where directors for ( non-core* ) economical or tax planning reasons wish to reorganise the structure of a group of companies Where directors and/or shareholders wish to close their business in order to retire *In some instances these disposals may in addition qualify for Substantial Shareholdings Exemption.

This article provides an overview of the HM Revenue & Customs (“HMRC”) tax scheme commonly referred to, and formerly known as, Entrepreneurs’ Relief. Whilst this phrase is still widely used, Entrepreneurs’ Relief was renamed as Business Asset Disposal Relief (“BADR”) in 2020.

For ease of reference throughout this article I have referred to the current scheme as Entrepreneurs’ Relief (BDR).

What is Entrepreneurs Relief?

Entrepreneurs’ Relief, now known as BADR, is a scheme operated by HMRC which grants a reduction to Capital Gains Tax (“CGT”) on the disposal of a qualifying business asset on after 6 April 2008.

In order to obtain this benefit you must meet HMRC’s qualifying conditions and each individual is subject to a lifetime limit. The qualifying limits are as follows:

Distribution between 6 April 2008 to 5 April 2010, £1 million
Distribution between 6 April 2010 to 22 June 2010, £2 million
Distribution between 23 June 2010 to 5 April 2011, £5 million
Distribution between 6 April 2011 to 10 March 2020, £10 million
Distributions on or after 11 March 2020, £1 million

What is BADR?

BADR was known as Entrepreneurs’ Relief before 6 April 2020. This scheme provides a 10% discount to all CGT arising on qualifying assets. You can qualify for BADR if you are:

Selling all or part of your business
Selling shares or securities
Selling assets you lent to the business

Further details can be obtained from HMRC at the following link: Business Asset Disposal Relief – GOV.UK (www.gov.uk)

Origins of Entrepreneurs’ Relief

Entrepreneurs’ Relief was initially introduced by the Labour party’s Chancellor of the Exchequer Alistair Darling. The spirit and principle behind Entrepreneurs’ Relief was to reward Entrepreneurs who founded companies which went on to create jobs, generate revenue for HMRC in the form of VAT, PAYE, NICs, Corporation Tax and other applicable taxes. This relief was therefore of benefit both to the individual entrepreneur, and also to the wider economy.

It was hoped that this benefit would encourage entrepreneurial spirit by offering a tangible reward to individuals for forming companies, growing those businesses, and ultimately selling on the businesses or concluding the activities of those businesses.

The future of Entrepreneurs’ Relief (BADR)

Entrepreneurs’ Relief has been replaced by BADR by the Conservative party’s Chancellor of the Exchequer Rishi Sunak in 2020. One main change is that lifetime limits on distributions, which had previously grown to £10million, have now been reduced done £1million.

Deferred gains are subject to variable rates, and in particular gains deferred until 11 March 2020 or later are now subject to the lifetime limit of £1million.

Do I qualify for Entrepreneurs Relief (BADR)?

Entrepreneurs’ Relief (BADR) can be granted to individuals and some trustees of settlements, but it is not available to corporate entities or in relation to a trust where the entire trust is a discretionary settlement. It is only claimable by representatives of deceased individuals if the relevant transaction took place prior to their passing.

How does entrepreneurs’ tax relief work?

Normally an individual’s entitlement to Entrepreneurs’ Relief (BADR) is assessed by the company’s accountant, who will establish if the criteria are met to obtain the relief. One regularly used method of claiming Entrepreneurs’ Relief (BADR) is to place the company into Members Voluntary Liquidation (“MVL”) in which a liquidator will finalise the affairs of the company, ensure all taxes and creditors are wholly repaid, sell any residual assets and, after settlement of their agreed costs, distribute the remaining funds to the company’s shareholders.

In turn the shareholders’ accountants will assist the shareholders in making the necessary submissions upon receipt of these funds to HMRC, so that tax is deducted at the applicable rate, thereby obtaining the savings granted by Entrepreneurs’ Relief (BADR).

How to claim Entrepreneurs’ Relief (BADR)

HMRC provides a form which is normally completed with your personal tax return, or equivalent. The request for the Entrepreneur’s Relief (BADR) to be granted would therefore be included within your tax calculation and the reduced payment, together any other taxes due from you, would be paid at this point.

Assuming this submission is accepted by HMRC, you will have the benefit of the discounted rate of tax.

How to calculate Entrepreneurs’ Relief (BADR)

Qualifying disposals made on or after 22 June 2010 attract a CGT rate of 10%. So if, for example, you followed the MVL route and received a distribution as shareholder of cash in the sum of £100,000, your qualifying Entrepreneurs’ Relief CGT liability would be £10,000, as opposed to at the usual (at the time of writing) rate of 20%, or £20,000.

What is Entrepreneurs’ Relief (BADR) limit?

In order to obtain this benefit, you must meet HMRC’s qualifying conditions, and each individual is subject to a lifetime limit. The qualifying limits are as follows:

Distribution between 6 April 2008 to 5 April 2010, £1 million
Distribution between 6 April 2010 to 22 June 2010, £2 million
Distribution between 23 June 2010 to 5 April 2011, £5 million
Distribution between 6 April 2011 to 10 March 2020, £10 million
Distributions on or after 11 March 2020, £1 million

What is the minimum shareholding to qualify for Entrepreneurs Relief (BADR)?

Disposing of the company

To claim Entrepreneurs’ Relief (BADR) on the sale of you must be a sole trader or business partner and you must have been an owner for at least two years. These conditions also apply if you are closing your business (for example using an MVL) and you must dispose of your assets within three years to qualify for Entrepreneurs’ Relief (BADR).

Disposing of Shares

To claim Entrepreneurs’ Relief (BADR) for the disposal of shares for at least two years prior to the date you sell your shares the company must be a “personal business” which means that you must have at 5% of both the company’s shares and voting rights. Additionally, you must be entitled to at least 5% of either the profits that are available for distribution on winding up of the company (through an MVL) or the disposal proceeds if the company is sold.

If the company issues more shares, which brings your ownership to less than 5% of the shareholding, you may also still be to claim Entrepreneurs’ Relief (BADR).

You will also be entitled to Entrepreneurs’ Relief (BADR) if your company has ceased trading and your shares are sold within five years.

Disposing of assets lent to the company

To claim Entrepreneurs’ Relief (BADR) on the disposal of assets you have lent to the company, you must have sold at least 5% of your part of the company or your share in the company, which must also be a “personal company” (see above) and you must have owned the assets but let the company utilise them for at least one year prior to the cessation of trade or the sale of the company.

For disposals prior to 29 October 2018, you must have held at least 5% of the ordinary share capital and in turn that shareholding must give you at least 5% of the voting rights in the company.

For disposals after 29 October 2018 in addition the above prerequisites you must also demonstrate that you have a 5% entitlement to:

Profits available for distribution
5% of the distributable assets on a winding up of the company, which must come from your holding of ordinary share capital
Proceeds in the event of a company sale.

How much tax do I pay if I sell my business?

If you qualify for Entrepreneurs’ Relief / BADR, you will be paying CGT at a rate of 10%. If you do not qualify for these tax reliefs, you will, at the time of writing, pay CGT at a rate of 20%.

Can you claim Entrepreneurs Relief (BADR) more than once?

There is no limit to the amount of times you can claim Entrepreneurs’ Relief, other than you can only currently benefit from the reduced rate of CGT on cumulative sales (of whatever form) totalling £1million. Above this level, you are no longer eligible for Entrepreneurs’ Relief / BADR.

Additionally, there are other restrictions on when you can claim Entrepreneurs’ Relief / BADR, many of which are detailed above. It is important to take formal advice if you are seeking to utilise the Entrepreneurs’ Relief (BADR) scheme as, if a claim is not executed correctly, or if you are not eligible, you will be required to pay the full rate of CGT at the current prevailing rate.

Is Entrepreneurs Relief (BADR) available on property?

You cannot claim Entrepreneurs’ Relief (BADR) specifically on the disposal of property. However, if you dispose of your company as a whole, and it holds a property, this would form part of the asset disposed of. Alternatively, if you own the property and allow it to be used by the Company, you may be eligible to dispose of it and obtain the benefit. It is recommended that specific advice is taken before undertaking this process as HMRC’s criteria for Entrepreneurs’ Relief (BADR) has changed and may well change in the future.

What is holdover relief?

Gift Hold-Over Relief is a form of relief which means that you do not pay CGT when you give away your assets and the acquirer pays CGT (if any would be due) when they dispose of the asset in the future.

If you are giving away assets, you must be a sole trader of a business or a partner with 5% of the votings rights of the Company (i.e. it must be “personal business”) and you must use the asset in your company.

If you are giving away shares, they must be in a company that is not listed on any recognised stock exchange and must be in a “personal business”.

Notably, this relief may not apply and you may have to pay tax, if you sell an asset for less than its worth, or make a gain on what you paid for the asset.

How do I claim holdover relief?

Gift Hold-Over Relief must be claimed jointly with the recipient of the asset(s). Your claim should be made when you give away the asset and should also form part of your personal tax return.

The current claim form and helpsheet (at the time of writing) is available here:

Capital Gains Tax relief on gifts and similar transactions (Self Assessment helpsheet HS295) – GOV.UK (www.gov.uk)

What is solvent liquidation?

A solvent liquidation, formally known as a Members Voluntary Liquidation (“MVL”) is a formal insolvency procedure under the Insolvency Act 1986 (as amended) and applies to companies which are solvent and can demonstrate that all creditors and liabilities can be paid in full with 12 months.

The members of the company appoint a liquidator or joint liquidators who take control of the company and manage its affairs to closure.

When is Solvent Liquidation applicable?

A solvent liquidation is applicable when a company has more assets than liabilities. Directors can liquidate the assets prior to the winding up proceedings, and the MVL is the vehicle through which creditors’ claims are confirmed as settled, taxation affairs are finalised, and clearance is granted by HMRC for the closure and dissolution of the company, and the liquidator(s), after settling their agreed costs, distributes the residual funds to the shareholders.

It is primarily utilised by companies to wind down their affairs and as a vehicle to enable their members to seek Entrepreneurs’ Relief (BADR) on the distributions paid by the liquidator.

Entrepreneur’s Relief Advice Summary

Entrepreneurs’ Relief has been a useful tax scheme for rewarding entrepreneurs for their wider contribution to society in creating jobs, trade and, of course, generating tax income for HMRC

However, it has also been utilised in different ways as a tax efficiency scheme, with a number of additional restrictions being applied to its operation over the years as larger entities structured their operations so as to seek ongoing benefits from the scheme – for example setting up companies to service a specific project, retaining the profits and distributing these whilst receiving the benefit, whilst sister companies undertook the same fundamental work simultaneously elsewhere.

It has therefore moved somewhat away from the spirit for the scheme was intended and the recent renaming of the scheme to BADR, and the reduction of the lifetime benefits from £10million to £1million is an indicator that the scheme may see future change and enhanced restrictions, and indeed may even be closed. Considering the Coronavirus Pandemic and the significant funding introduced into the economy by the Government, it is increasingly likely that further taxation will be required and as such the benefits of the BADR scheme may be reduced or be revoked.

Business owners may therefore wish to consider this if they are contemplating winding down or disposing of their business, as there are significant tax benefits available whilst the scheme remains in operation.

For further information and impartial advice, feel free to give us a call on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk