You may be able to pay less Capital Gains Tax when you sell (or ‘dispose of’) all or part of your business.
Business Asset Disposal Relief means you’ll pay tax at 10% on all gains on qualifying assets.
Business Asset Disposal Relief was known as Entrepreneurs’ Relief before 6 April 2020.
If you’re selling all or part of your business
To qualify for relief, both of the following must apply for at least 2 years up to the date you sell your business:
- you’re a sole trader or business partner
- you’ve owned the business for at least 2 years
The same conditions apply if you’re closing your business instead. You must also dispose of your business assets within 3 years to qualify for relief.
If you’re selling shares or securities
To qualify, both of the following must apply for at least 2 years up to the date you sell your shares:
- you’re an employee or office holder of the company (or one in the same group)
- the company’s main activities are in trading (rather than non-trading activities like investment) – or it’s the holding company of a trading group
There are also other rules depending on whether or not the shares are from an Enterprise Management Incentive (EMI).
If the shares are from an EMI
You must have both:
- bought the shares after 5 April 2013
- been given the option to buy them at least 2 years before selling them
If the shares are not from an EMI
For at least 2 years before you sell your shares, the business must be a ‘personal company’. This means that you have at least 5% of both the:
- voting rights
You must also be entitled to at least 5% of either:
- profits that are available for distribution and assets on winding up the company
- disposal proceeds if the company is sold
If the number of shares you hold falls below 5% because the company has issued more shares, you may still be able to claim Business Asset Disposal Relief.
You need to choose or ‘elect’ to be treated as if you had sold and re-bought your shares immediately before the new shares were issued. This will create a gain on which you can claim Business Asset Disposal Relief.
You can also choose or ‘elect’ to postpone paying tax on that gain until you come to sell your shares.
You can do this by:
- completing the additional information section of the Capital Gains summary form of your tax return
- writing to HMRC if you do not have to complete a tax return for the year
If the company stops being a trading company
If the company stops being a trading company, you can still qualify for relief if you sell your shares within 3 years.
If you’re selling assets you lent to the business
To qualify, both of the following must apply:
- you’ve sold at least 5% of your part of a business partnership or your shares in a personal company
- you owned the assets but let your business partnership or personal company use them for at least one year up to the date you sold your business or shares – or the date the business closed
If you’re a trustee
You may also qualify if you’re a trustee selling assets held in the trust.
Work out your tax
How you work out your tax depends on whether all your gains are eligible for Business Asset Disposal Relief.
If all your gains qualify for Business Asset Disposal Relief
- Work out the gain for all qualifying assets.
- Add together the gains (and deduct qualifying losses) to work out the total taxable gain that’s eligible for Business Asset Disposal Relief.
- Deduct your tax-free allowance.
- You’ll pay 10% tax on what’s left.
If you have other gains
How much tax you pay on your other gains depends on what Income Tax rate you pay.
Higher rate Income Tax payers
For gains that do not qualify for Business Asset Disposal Relief you’ll pay:
- 28% on gains from residential property
- 20% on gains made from other chargeable assets
You can use your tax-free allowance against the gains that would be charged at the highest rates (for example where you would pay 28% tax).
Basic rate Income Tax payers
If you’re a basic rate taxpayer, you need to work out the tax rate you’ll pay on gains that are not eligible for Business Asset Disposal Relief.
- Work out how much taxable income you have – deduct your Personal Allowance and any other Income Tax reliefs you’re entitled to.
- Deduct this amount from the basic rate tax band for the year you made the gains (£37,700 for the 2021 to 2022 tax year). This gives you the amount of basic rate band you can use against your gains.
- Work out your total taxable gain.
- Use your basic rate band first against any gains eligible for Business Asset Disposal Relief. You’ll pay 10% tax on these.
- Use any remaining basic rate band against your other gains. You’ll pay 18% on gains made on residential property and 10% on gains from all other chargeable assets.
- For gains above the basic rate band you’ll pay 28% on gains made on residential property and 20% on gains from all other chargeable assets.
- You can use your tax-free allowance against the gains that would be charged at the highest rates (for example where you would pay 28% tax).