What is Business Asset Disposal Relief when closing a company?

Author
Shaun Barton | Company Closure Expert

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What is Business Asset Disposal Relief when closing a company?

Business Asset Disposal Relief (BADR) is a form of tax relief that you may be eligible to claim when closing a company. Prior to April 2020, it was called Entrepreneurs’ Relief and it reduces the amount of tax you pay when closing your business.

BADR is typically associated with the solvent liquidation process, Members’ Voluntary Liquidation (MVL) and the potential entitlement to claim could make this procedure a highly tax-efficient option.

What is Members’ Voluntary Liquidation?

Members’ Voluntary Liquidation is an official way to close a solvent company and must be carried out by a licensed insolvency practitioner (IP). It enables you to close your business in an orderly way and gain reassurance that you’ve fulfilled all your legal duties as a director.

Once members have passed a resolution to close the company in this way, the appointed liquidator takes care of all business affairs and winds down the company according to statutory requirements.

So how does Business Asset Disposal Relief benefit you when closing your business and what are the conditions for claiming?

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How does Business Asset Disposal Relief work when liquidating a company?

Business Asset Disposal Relief reduces the higher rate of 20% Capital Gains Tax (CGT) liability on the closure of your company to 10% on qualifying gains. A lifetime limit of £1 million is in place for BADR.

Claiming offers you a significant saving as your tax liability is effectively halved if you’re a higher-rate taxpayer, and it allows you to extract the maximum value from your solvent company.

To be able to claim you must have traded for at least two years and dispose of your business assets within three years. There’s also a restriction on carrying out a similar trade or activity during the three years following closure. This is to minimise the likelihood of MVL being used as a tax avoidance route.

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How to claim Business Asset Disposal Relief

When a distribution is made from your company on closure it must be included on your self-assessment tax return for the appropriate tax year. The distribution is known as a ‘chargeable event’ in terms of Capital Gains Tax liability.

You can also claim Business Asset Disposal Relief by using Section A on the Business Asset Disposal Relief help sheet. If you exceed the £1 million lifetime limit you’ll pay the standard 20% Capital Gains Tax on gains above this limit if you’re a higher rate taxpayer. The deadline for claiming BADR is one year following the end of the tax year in which the company closed down.

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Seek professional guidance on BADR

Business taxation is complicated and it always pays to obtain professional advice on your most tax-efficient options when closing a company. Business Asset Disposal Relief is an invaluable tax relief scheme that enables eligible business owners to reap the rewards of their hard work.

Company Closure can provide more information on claiming BADR when closing your company. Please get in touch to arrange a free consultation – we operate a network of offices around the country.

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