Rumours before the 2024 Budget about steep hikes to capital gains tax sent many business owners into a panic. Whilst the actual rate increases announced on 30 October were not as high as feared, change is afoot. Business owners considering an exit should understand the new rules, tax rates and how to proceed. This article explains the tax rate changes and the qualifying criteria for Business Asset Disposal Relief (BADR).
BADR is a special tax relief available to qualifying business owners and shareholders when they sell their business or shares in their personal company. It is only available to offset against the first £1million of qualifying gains and it replaced the old entrepreneurs’ relief introduced by the former Labour government. Unfortunately however, it is no longer as generous as it used to be.
What are the CGT rates for business gains?
Business owners and shareholders who qualify for BADR will be entitled to the current 10% rate of capital gains tax on the first £1m of qualifying lifetime gains until 5 April 2025. After that date, the rate increases to 14% until 5 April 2027, when it increases further to 18%. This brings it up to the same rate of capital gains tax payable by basic rate taxpayers against a gain on any asset.
As a tax relief, BADR can be used for the first £1million of a gain and after this amount, CGT is payable at the taxpayer’s marginal rate. Currently this is either 18% or 24%. So if you sell a business or qualifying shares and make a gain of £5million, the first £1million can attract BADR with the remaining £4million taxed at the CGT rates generally applying.
Effectively therefore, by 2026 all CGT rates will be the same, apart from the fact that those qualifying for BADR will have the first £1m of gains taxed at the same rate as a basic rate taxpayer.
Eligibility for BADR
There are some strict qualifying criteria for entitlement to BADR as follows:
- Must be a trading company
BADR is only available for trading businesses or shares in trading companies; this excludes the vast majority of property businesses. If a business or company is mainly trading but has some additional non-trading activities, this can preclude the availability of BADR.
- Minimum period of ownership
The business or company shares must have been owned by the individual for at least two years ending on the date of the disposal. If the taxpayer is an employee selling their shares in a company, unless the shares have been acquired under a qualifying Enterprise Management Incentive (EMI) scheme, that individual must also own at least 5% of the ordinary share capital of the company and must have 5% of the voting rights. They must also be eligible to receive at least 5% of the income and/or 5% of the capital of the company.
- Role in the business
The individual must be a director (or other officer), or an employee of the company.
All three of these conditions must be met for at least two years leading up to a sale. This means that anyone who currently doesn’t meet the criteria and wants to take advantage of the lower CGT rates is not likely to succeed before the 18% rate comes into effect.
Note that HMRC will strictly enforce these qualifying criteria. If you only have 4.9% of the company’s shares or the company does not fully meet the tradition condition, BADR will not be available.
How will BADR rate changes impact gains from selling your business?
Given that the main capital gains tax rates increased immediately from Budget day, the six month window until April 2025 for a lower rate of BADR is slightly more generous.
It means that whilst the £1 million limit remains the same, the maximum BADR tax saving is £140k (when compared to the current main rate of CGT of 24%) which will reduce to £100k from April 2025 and reduce again to £60k from April 2026.
In summary, BADR is not as simple as it first appears. There is clearly a closing window of opportunity to take full advantage of this relief, but rushing a commercial decision purely for tax purposes is clearly not advisable. If you are hoping to exit your business, it will be helpful to discuss this with your tax advisor as soon as possible.
Finally – when does the tax become payable?
Dates are important for capital gains tax purposes. The CGT liability arises based on the date on which the contract for sale becomes unconditional; not necessarily when cash consideration is received. Caution should be taken in relation to deferred consideration to ensure the tax payment date doesn’t occur before sufficient consideration has been received to meet the total tax liability.
The CGT liability in relation to a sale of a business or shares arises on 31 January following the tax year of sale. For example, on a sale taking place on 30 November 2024, the capital gains tax will be payable on 31 January 2026. As above, this liability will arise based on all consideration, including deferred cash consideration.