Business Asset Disposal Relief
Capital Gains TaxMerranti

Business Asset Disposal Relief (BADR): The Long Goodbye?

The Autumn Budget 2024 introduced significant changes to capital gains tax (CGT), including increases in CGT rates and a gradual phasing out of Business Asset Disposal Relief (BADR). These changes will have a major impact on business owners, particularly those planning to sell their businesses in the coming years.

This article examines the key CGT changes, the future of BADR, and how business owners can plan accordingly.

Headline Changes to CGT Rates

From 30 October 2024, the main CGT rates increased:

  • The basic rate CGT increased from 10% to 18%.
  • The higher CGT rate increased from 20% to 24%, aligning with residential property gains.
  • Trusts and estates are now subject to the same higher CGT rates.
  • The CGT rate for carried interest remains at 28%.

Annual Exemption

  • The annual CGT exemption remains at £3,000.
  • Taxpayers can allocate their basic rate band, losses, and annual exemption to whichever gains they prefer.
  • However, gains eligible for BADR must use the basic rate band first before applying it to other gains.

These increases mean that business owners selling assets after 30 October 2024 will face higher CGT liabilities, particularly those who do not qualify for BADR.

The Future of Business Asset Disposal Relief (BADR)

Increase in the BADR Tax Rate

While BADR remains in place, the tax rate will increase:

  • 2024/25: 10%
  • 2025/26: 14%
  • 2026/27 and beyond: 18%

The £1 million lifetime limit on BADR remains unchanged, but the tax benefit is gradually being eroded.

Tax Year CGT Rate for BADR Gains CGT Rate for Non-BADR Gains Tax Saving on £1m BADR Gains
2024/25 10% 24% £140,000
2025/26 14% 24% £100,000
2026/27 18% 24% £60,000

At its peak, when the relief was called Entrepreneurs’ Relief, the lifetime limit was £10 million, meaning a maximum tax saving of £1 million. Now, the maximum benefit in 2026/27 will be just £60,000, raising questions about whether BADR will eventually be abolished altogether.

The renaming of Entrepreneurs’ Relief to BADR already hinted at a shift in policy. This move aligns with the government’s view that BADR does not significantly encourage entrepreneurship and has been primarily used as a tax-minimisation tool for business owners.

The Impact on Deferred BADR Gains

There are several cases where gains eligible for BADR have been deferred and will crystallise in the future. These gains will be taxed at the prevailing BADR rate at the time of disposal, rather than the original 10%.

Two Key Scenarios Where Deferred Gains Will be Affected

  1. Loan Note Consideration
    • When a business is sold in exchange for loan notes, the CGT liability is deferred until the loan notes are redeemed.
    • If the seller meets BADR conditions at redemption (e.g., owning 5% of the company and working there for at least 24 months), they can claim BADR.
    • However, the tax rate applied will be 14% in 2025/26 and 18% in 2026/27, rather than the 10% originally expected.
  2. Deferred Gains Under the FA 2019 Election
    • Under Finance Act 2019, Schedule 16, business owners who fall below the 5% ownership threshold due to a fundraising event can elect to defer the gain.
    • When they eventually dispose of the shares, BADR may still apply—but at the new, higher rate.

Key Point: BADR Applies, But at the Higher Rate

  • If an individual deferred BADR-eligible gains, they still qualify for BADR, but at the new, higher tax rate in force at the time of disposal.
  • Business owners should review their deferred gains and assess whether accelerating disposal before April 2026 might be beneficial.

Planning for the Changes: What Business Owners Should Consider

1. Selling a Business? Consider Timing Carefully

  • If you are planning to sell a business, completing the sale before April 2026 will secure the 14% BADR rate.
  • Delaying a sale until 2026/27 or later will mean a higher 18% BADR tax rate.

2. Reviewing Loan Notes and Deferred Gains

  • If you sold a business in exchange for loan notes, consider redeeming them sooner rather than later to benefit from the lower BADR rate.
  • Business owners with FA 2019 deferred gains should review their election strategy and assess whether early disposal is preferable.

3. Maximising Other CGT Reliefs

  • Use available losses to offset gains taxed at the higher 24% rate.
  • Spread disposals over multiple tax years to make use of the £3,000 annual CGT exemption.

4. Alternative Business Exit Strategies

  • Consider a Management Buyout (MBO), which could allow a phased disposal over multiple years, keeping gains within lower tax bands.
  • Look into Enterprise Investment Scheme (EIS) reinvestment relief, which can defer CGT on gains that are reinvested in qualifying investments.

5. Business Succession and Estate Planning

  • If selling a business is not urgent, explore succession planning options, such as gifting shares to family members or a trust.
  • Consider spousal transfers to spread CGT liabilities between two individuals.

Conclusion

The gradual phasing out of BADR means that business owners should rethink their exit strategies. While the relief remains available, its tax-saving benefit is shrinking each year.

Key takeaways:

  1. The BADR tax rate is increasing—from 10% to 14% in 2025/26 and 18% in 2026/27.
  2. Deferred BADR gains will be taxed at the new, higher rate when they crystallise.
  3. Business sales should be carefully timed—completing before April 2026 locks in the 14% rate.
  4. Owners with loan notes or deferred gains should review their tax position and consider accelerating disposals.
  5. Alternative planning strategies, including phased sales, reinvestment relief, and succession planning, should be explored.

With CGT rates rising, business owners need to act sooner rather than later to protect their wealth and optimise their tax position.

 

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