The recent Budget has introduced changes to Business Asset Disposal Relief (BADR), a vital tax relief for business owners looking to reduce their Capital Gains Tax (CGT) liabilities when selling all or part of their business.
Changes to BADR rates
Business owners relying on BADR can breathe a sigh of relief, as the anticipated abolition of this relief did not materialise.
However, the rates will increase over the next two years, requiring proactive tax planning to relieve the impact.
From April 2025, the BADR rate will increase from 10 per cent to 14 per cent, and by April 2026, it will align with the lower CGT rate of 18 per cent.
The relief is currently worth £140,000, being the difference between the current 10 per cent rate and the main 24 per cent rate but will decrease in value to £100k from April 2025 and £60,000 from April 2026, assuming no other changes.
These changes bring BADR closer in line with the main CGT regime, reflecting the Government’s aim to balance tax advantages for entrepreneurs with the need for what they consider to be a fair tax contribution.
The phased approach to these changes gives business owners time to reassess their plans. For those considering selling their business, this is the moment to review potential disposals and consider whether acting sooner could reduce your tax liability.
This is particularly relevant for business owners nearing retirement or planning a major transition, as the timing of a sale can greatly influence the financial outcome.
Delaying a sale until after the new rates come into effect could result in a substantially higher tax bill, which may impact long-term financial goals.
On the other hand, early preparation can help ensure that you are in the best possible position to maximise reliefs and minimise liabilities.
Business owners should explore how these changes affect their broader financial strategy.
This could involve reviewing your business’s valuation, identifying qualifying assets, or restructuring ownership to optimise reliefs.
In some cases, it may be worthwhile considering Employee Ownership – a sale to an Employee Ownership Trust (EOT) comes with some strict conditions, but can enable shares to be sold without any CGT liability.
The value of BADR for business owners
BADR remains a highly valuable relief for entrepreneurs, reducing the CGT rate on qualifying business disposals and significantly lowering tax liabilities.
This relief is particularly beneficial for those retiring or transitioning to new ventures, offering a more affordable way to realise the value of years of hard work.
While the changes may increase the tax burden on future disposals, the fact that BADR has been retained means business owners can still benefit from reduced CGT rates on qualifying sales.
However, the increased tax burden requires careful planning. This includes reviewing business structures and ownership arrangements to ensure they meet the qualifying criteria for BADR.
There are various criteria to be met, however, it is important to ensure that you have held shares for the minimum required period of two years and are registered as an employee or director of the business for this period. There is also a five per cent minimum shareholding criteria.
Timing is another factor. If you are considering a sale, it may be worth accelerating the process to take advantage of the lower rates before April 2025.
Alternatively, if waiting helps the financial aims of your business, then understanding the exact implications of the new rates will help you plan for the increased liability.
BADR is not applied automatically. The claim will need to be assessed and included as part of your tax return.
In some cases, restructuring the business or transferring ownership to a spouse or partner before disposal can help spread the tax liability and make better use of the available tax-free allowances. This requires careful legal and financial planning to ensure compliance and avoid unexpected complications.
Planning ahead for the changes
The phased rate increase gives business owners time to adjust their plans, but it also highlights the importance of proactive tax advice.
Timing is key when it comes to asset disposals, and understanding the implications of the new rates can make a difference to your tax bill.
We are committed to helping you with these changes and making the most of available tax reliefs.
Our team can assist you with the sale of your business and reviewing your business strategy, ensuring you remain compliant and optimise your tax position. Contact us for more information.