Where are we with BADR?

In April 2020, the UK’s entrepreneurs’ relief initiative was replaced by business asset disposal relief (BADR) under the Finance Act 2020. For several years, even before the current economic climate caused by COVID‑19, there were calls for the relief to be reformed or abolished. Its provision of a flat 10 per cent capital gains tax (CGT) rate is an attractive relief and a worthy successor to taper relief and its predecessor, retirement relief. Despite having survived so far, however, the relief is a shadow of its former self.

BADR is available on the sale of:

• a business (or a freestanding part of a business, although it is often hard to determine what that is);
• business assets upon cessation of trading;
• assets used by a company or partnership upon withdrawal from that business; and
• unquoted trading company shares.

Trustees of interest in possession (IIP) trusts can also claim BADR; however, this is a sore point. Her Majesty’s Revenue and Customs (HMRC) insists that the life tenant must have had an IIP in the trust for the 24 months prior to sale by trustees of settled assets or shares, despite the legislation not actually stating this and suggesting only that an IIP must exist at the time of sale. Indeed, at the time of writing, the case of HMRC v Quentin Skinner 2005 Settlement L & Ors was deciding that very point.¹ Although the First‑tier Tribunal (Tax) found against HMRC’s interpretation,² the Upper Tribunal (Tax and Chancery Chamber) recently found in favour. The England and Wales Court of Appeal will soon be deciding which view is right.

When the relief was first introduced in 2008, the UK was suffering its worst recession in decades, so something was needed to encourage inward investment. As one of the major concerns of entrepreneur investors is an efficient exit, the old retirement relief was dusted off, changed slightly and labelled entrepreneurs’ relief. Numerous changes were then made over the following years.

As the economy improved, there were concerns that the relief was not actually achieving what it had set out to do in attracting investment. There were concerns too about how much tax it was costing Her Majesty’s Treasury: GBP2.7 billion in 2019/20, according to HMRC’s own statistics.³ So, the government gradually tightened up some of the relatively liberal criteria.

In 2015, requirements tightened for individuals selling off‑balance sheet assets; the asset would now have to have been owned for three years, in addition to being used in the business for (at that time) 12 months. Further, the shareholder/partner must reduce their stake in the company/partnership by at least 5 per cent, which in turn must have been held for at least three out of eight years. In 2018, the definition of ‘personal companies’ changed to include a 5 per cent stake in distributable reserves and assets upon winding up, not merely the ordinary share capital and voting rights.

The biggest change, however, came in 2020’s budget. As well as the name change, the lifetime limit of relievable gains was reduced from GBP10 million to its original GBP1 million, an act that might as well have abolished the relief for many. Because the limit is indeed a lifetime one, it has a built‑in retroactive effect; anyone who had already amassed more than GBP1 million of relievable gains in their lifetime was instantly barred from further relief. It is no worse than the original 2008 allowance, and although it is still a big drop from GBP10 million, there is still potentially GBP100,000 of CGT savings available.

Conclusion

BADR remains a valuable relief, albeit not as valuable as it was before April 2020. The criteria are still relatively relaxed and a trading business owned for two years or more will usually attract the 10 per cent rate when the owner sells it. The change in the ownership requirement from 12 to 24 months did little more than bring the criterion in line with that for inheritance tax business property relief; only 5 per cent full and genuine ownership of a company is still required alongside employment/directorship. Depending on how the country recovers from the COVID‑19 disaster, BADR could still be among the first for the chop in the future, but even though it has taken a heavy trim already, we should remain thankful it is here at all.