Lisa Stevenson is the founding partner of Parisi Tax which is a law firm specialising in tax issues for private companies and their shareholders. In this article, Lisa provides a reminder of the new rules relating to Business Asset Disposal Relief.
The lifetime limit for capital gains that can be subject to entrepreneurs’ relief ( re-named business asset disposal relief referred to as “BADR” for tax year 2020/21 onwards) has been reduced from £10m to £1m.
A successful BADR claim reduces the rate of capital tax on the sale of a business asset (which includes certain shares) to 10%, so this curtailment is very significant.
For a sale of shares to qualify for BADR, throughout the period of two years ending with (and including) the date of disposal of the shares, the individual selling the shares must:
- be an employee or director of the company (or a member of its group);
- hold at least 5% of the share capital of the company by nominal value;
- be entitled to exercise at least 5% of the votes in the company by virtue of that holding; and
- be beneficially entitled to at least 5% of either:
- the profits available for distribution / assets on a winding up; or
- the share sale proceeds if all of the ordinary share capital of the company was sold (and for this test the value of the company at the time of the actual sale is deemed to be the same throughout the whole 2 year qualifying period, so you don’t have to worry about what the company value might have been at the various times in the qualifying period).
The company must also be a trading company or holding company of a trading group throughout that same two year period.
For those shareholders / business owners who will be, or perhaps more importantly in time would expect to be, impacted by the restriction in the lifetime allowance, some steps that they may want to consider now are:
- Splitting shareholdings amongst family members. The (now) £1m lifetime allowance is a per-person entitlement, so if there are multiple family members who all meet the BADR qualifying conditions for the necessary two year period to sale, they could all claim. Inter-spouse gifts of shares should not trigger any adverse tax consequences and it should also be possible to avoid tax charges on gifts to other family members by entering into hold over elections, but tax advice should be taken on any transfers within the family. All transfers must be genuine “no strings attached” transfers (i.e. the asset and therefore the proceeds of sale must genuinely belong to the transferee).
- If any of the shares in the company are held in a trust, it should be remembered that trustees can claim BADR on a share sale where there is a beneficiary with an interest in possession in the trust property and who himself qualifies for ER in respect of the company. So if there is a life tenant beneficiary of the trust who works for the business, then if that beneficiary held 5% of the shares in the company in his own right for at least two years prior to sale, both the beneficiary (on his own shares) and the trustees could claim BADR . However the £1m cap would in that case be in aggregate for those two sales (i.e. they do not have £1 million each, just between them) so this is much less worthwhile than it used to be and if the values are such that the beneficiary will easily use up his own £1 million on his own holding this ceases to be relevant.
As the BADR qualifying period is now two years, any such steps need to be considered well in advance of a sale.
Where a family member holding a 5% plus interest does not have a genuine employment role in the business he or she could still qualify for BADR if appointed as a director 2 years before the sale but that of course brings with it directors’ duties so this needs to be considered carefully. We often come across companies where family members are on the payroll but do not perform any real employment role. This brings with it a number of potential problems. There may be issues with corporation tax deductions taken in respect of such payments and also whether the correct rate of PAYE was applied (ie was this really salary of the higher rate spouse?).This can cause problems on the sale of the company as a buyer is likely to insist that this is disclosed to HMRC. From the individual shareholder’s perspective if it is not a genuine employment HMRC could well challenge whether BADR is actually available.
If you have any questions regarding Business Asset Disposal Relief, or any other tax related enquiries, please contact Lisa at firstname.lastname@example.org.