In the latest UK Budget, Chancellor Rishi Sunak unveiled changes to entrepreneurs’ relief (ER) which came into effect from 6 April 2020. These included renaming it business asset disposal relief, but some other alterations have been made to the system itself.
Sunak justified these changes on the basis that the existing ER was ‘expensive, ineffective and unfair’ and three quarters of it was going to only 5,000 people. It has also been suggested that the system was altered in response to criticism that it has not driven entrepreneurship in the way that it was intended to. It is estimated that 80 percent of small businesses will not be affected by the change to ER and that introducing business asset disposal relief will save the Treasury £6 billion during the next five years.
What is business asset disposal relief?
Business asset disposal relief, and entrepreneurs’ relief before it, were designed to help qualifying individuals to pay less capital gains tax when selling all or part of a business, or when selling shares or assets. Assets which qualify for business asset disposal relief are taxed at a fixed rate of 10% under this system.
How do I qualify for business asset disposal relief?
If you are a business owner selling all or part of your business, then both of the following need to have applied for at least two years prior to the sale:
- You are a sole trader or a business partner
- You have owned the business for at least two years
This also applies if you are closing a business, and in order to qualify for relief on any capital gains as a result of a business closure you must dispose of assets within three years.
There are a number of additional rules if you are selling shares or assets, which are detailed in full on the government’s website.
How do I calculate my tax if I qualify for business asset disposal relief?
If all your capital gains are eligible for business asset disposal relief, you should add them together and deduct the tax-free allowance of £12,300. On the rest, you will pay the reduced rate of 10%.
If you are a higher rate taxpayer (earning more than £50,000 per annum), on gains which do not qualify for business asset disposal relief, you will pay tax of 28% if they date from before 6 April 2016 or come from residential property. If they date from more recently, you will pay 20% tax.
If you are a basic rate taxpayer (earning between £12,500 and £50,000 per annum), for gains which do not qualify for business asset disposal relief – and fall below the basic rate band for the relevant tax year – you will pay tax of 18% if they date from before 6 April 2016 or come from residential property. If they date from more recently, you will pay 10% tax.
How do I claim business asset disposal relief?
You can claim business asset disposal relief either through your own self assessment tax return or by filling in section A of the business asset disposal relief helpsheet. There is no limit to how many times you can claim.
What has changed between entrepreneurs’ relief and business asset disposal relief?
While key elements such as the tax rate remain the same, the biggest change from ER is the lifetime allowance which has been significantly reduced, drastically scaling back the overall availability of the tax relief.
Claims are now limited to the first £1 million of lifetime gains, where previously the allowance was £10 million. This means that anyone who has already claimed ER on gains of £1 million does not qualify for business asset disposal relief on any future disposal. With the rate set at 10 per cent this means that in cases where you would otherwise be paying 20% (as outlined above) the relief can now be worth a total of £100,000 where previously it could be worth £1 million