Business asset disposal relief – Entrepreneurs’ relief is no more (in name at least)
Last March, one of the headline-grabbing measures announced in what will be the only Budget speech of 2020 surrounded what we knew as entrepreneurs’ relief.
The relief was designed to be an incentive for entrepreneurs to start a new business by reducing the amount of capital gains tax payable when the time came to dispose of (or sell) certain business assets, where conditions are met.
The name change from Entrepreneurs Relief to Business Asset Disposal Relief does not have any practical impact on how the relief operates. You still pay capital gains tax at 10% when you dispose of any qualifying assets in 2020/21.
There is no limit to the number of times you can claim the relief, but you can only claim up to £1 million of business asset disposal relief during your lifetime. Before 11 March 2020, this was £10m.
What that means is that if you have already claimed entrepreneurs’ relief on gains of £1m or more, any future disposals will not qualify for the relief in its new guise.
Alternatively, if you have never previously claimed entrepreneurs’ relief, only the first £1m will qualify for the 10% with the rest of the disposal taxable at 20% in 2020/21.
Who can claim it?
To claim the relief, various conditions apply depending on which asset you are planning to dispose of. This could be all or part of your business, shares or securities in an unquoted trading company, or other assets you lent to the business.
To qualify on disposal of a business in 2020/21, you must be a sole trader or in a business partnership, or have owned the shares in a trading company and have owned the business for at least two years.
If you plan to close your business, perhaps due to the financial implications of COVID-19, all business assets must be disposed of within three years to be eligible.
Whether you qualify for entrepreneurs’ relief or the new business asset disposal relief, the calculation is the same.
Remember, this is not a capital gains tax exemption. Assuming you meet the criteria, it simply allows you to reduce the rate of capital gains tax you pay on any profits made from the disposal of eligible business assets.
Gains from one asset
Where the only profit you make in a tax year arises from the disposal of any business asset or your business itself, and qualifies for this relief, only one capital gains tax rate applies.
We approach this by establishing the overall profit made, deducting any qualifying costs and subtracting those from your gain. We then take off your capital gains tax allowance, which is £12,300 in 2020/21, to further lower your capital gain that will be subject to capital gains tax.
Once this allowance has been applied, your capital gains tax bill will be 10% of that final figure.
For higher-rate or additional-rate taxpayers, tax is charged at 28% on any gains made on residential properties that are not your main residence. A rate of 20% applies to the disposal of other types of chargeable assets.
If you qualify for entrepreneurs’ relief, 10% of the gain made from the disposal of qualifying assets is the final calculation that makes up your capital gains tax bill.
You still have your capital gains tax allowance to deduct, which we advise you use against the gain which makes you liable for the highest tax rate that applies to you.
For basic-rate taxpayers, the tax rate you pay depends on the size of the gain, your taxable income, and the type of asset.
Claiming the relief
Just like entrepreneurs’ relief, you can claim business asset disposal relief in your self-assessment tax return if the sale of your business or any qualifying business asset goes through in 2020/21.
It’s been reported that Rishi Sunak’s advisers are exploring a number of potential avenues to recoup the large cost of the pandemic, such as reduced CGT allowances and increased rates of income tax. If these changes are agreed, expect them to be announced in the next budget due in March 2021.
For business or rental property owners looking to sell all or part of their business/property, either to family or via a management buy out, you may want to act sooner rather than later.
For further information on business asset disposal relief, please contact Geoff Rhodes on 023 8046 1239.