If you work with clients or manage a business of your own, there’s no escaping talk of changes to Business Asset Disposal Relief (BADR) and capital taxes. Recent and upcoming reforms mean it’s more important than ever to stay up to speed. Below is a friendly overview drawn from a recent CPD session, highlighting how to spot potential issues and opportunities. We’ll also walk through a few scenarios – featuring slightly tweaked examples – to give these rules more life.
1. A Quick Recap of Business Asset Disposal Relief
Traditionally known as Entrepreneurs’ Relief, BADR offers a reduced capital gains tax (CGT) rate when disposing of qualifying business assets. Up to 5 April 2025, the CGT rate for qualifying disposals remains 10%. After that, it is set to rise to 14% and then to 18% from April 2026 onward.
To qualify, you typically need:
• 5% Shareholding in a trading company
• Two years’ minimum ownership
• Active employment (director, officer, or employee) within that company
• A lifetime disposal limit of £1 million at these preferential rates
For unincorporated businesses (like sole traders or partnerships), BADR can apply if the entire trade (or a distinct part of it) is sold or ceased. There are also rules for associated disposals (e.g., selling a personally owned office building used by your trading business). Watch out for rent charged to the company or partnership – this can reduce how much relief you get.
2. Furnished Holiday Lets: Shifting Sands
Scenario: Naomi’s Lakeside Chalet
• Naomi has run a successful furnished holiday let for two years. Demand, however, has dropped, and new tax rules from April 2025 will treat many holiday lets more like regular rentals.
• If Naomi decides to cease her holiday let before April 2025, the three-year window means she may still claim BADR on its eventual sale – provided she meets the original furnished holiday let conditions for that prior period.
• If, on the other hand, she continues renting it out as a holiday property beyond April 2025, her sale may miss out on the original relief.
This timing quirk can be a meaningful planning point if the property no longer generates good profits. Owners often compare continuing as a holiday let versus switching to a long-term tenancy and then selling within three years.
3. Mixing Trading Companies and Investments
Scenario: Jayne & Leo’s Childcare Business
• Jayne and Leo ran a profitable childcare company. They formed a holding company on top, then purchased residential buy-to-let properties through the holding company using spare funds.
• When Jayne later wanted to sell the childcare trade to fund her retirement, the sale proceeds landed in the holding company – now mingled with investment property income. Extracting these funds personally became less tax-efficient, as large dividends attract higher rates of income tax, and a winding-up may be complicated by the company’s investment arm.
A simpler path for some is to keep trading and investment activities separate. That way, if you sell the trading company, winding it up (to benefit from CGT treatment on funds taken out) is more straightforward. A little forethought can avoid being “locked in” alongside investment property you’d rather keep or pass on.
4. Winding Up a Small Company
Scenario: Sam the Contractor
• Sam had a limited company but no longer sees benefits in staying incorporated. He wants the leftover cash out as cheaply as possible.
• If the company’s net assets are below £25,000, Sam can apply to strike off at Companies House, and the final distribution is then treated as a capital sum (potentially at the 10% BADR rate if he’s closing a genuine trade).
• Where more than £25,000 remains, a formal liquidation might be the solution – even if it costs some thousands in liquidation fees. This can still work out cheaper than taking all remaining funds as dividends, especially at higher income tax rates.
Always compare the cost of professional liquidation with the likely tax saving from capital treatment. And remember the three-year rule for claiming BADR if the trade itself ceased recently.
5. Gifting Shares & Inheritance Tax Considerations
Many are doing succession planning early:
• Gifting shares to children or grandchildren can trigger CGT now, but a gift relief claim can postpone the tax, rolling the gain into the recipient’s base cost.
• Still, if the original owner lives seven years, the value may fall out of their estate entirely, mitigating inheritance tax (IHT).
• However, from April 2026, 100% Business Property Relief will be capped at £1 million for IHT. Couples often consider restructuring their Wills so that each spouse can pass shares down directly, effectively doubling the family’s tax-free threshold for BPR.
It’s about balancing trade-offs: paying some CGT today, preserving reliefs for heirs, or awaiting different future rules.
Final Thoughts
The world of capital gains tax, BADR, and inheritance tax planning can look ever-shifting. Paying close attention to timing, disposal methods, and relief conditions can provide genuine opportunities for savings. Whether it’s figuring out the best way to exit a thriving trade, reorganising a family company, or debating how to handle a no-longer-profitable holiday let, a little forward thinking goes a long way.
If this sparks any specific queries, it’s always worthwhile gathering all the facts – date of acquisition, how the asset is used, future plans – and comparing different routes. It may just save you a significant amount of tax down the line.
For further information, contact us at TS.Tax