Business Asset Disposal Relief (BADR)/ Entrepreneurs’ Relief (ER)

October 28, 2020by Admin

Business Asset Disposal Relief (BADR) previously known as Entrepreneurs’ Relief (ER)


Business Asset Disposal Relief was known as Entrepreneurs’ Relief before 6 April 2020.


BADR/ER provides a beneficial 10% Capital Gain Tax rate on the first £1 million of eligible gains per individual (which is tested on a lifetime basis). The Budget 2020 slashed the lifetime gains limit for the relief from its previous level of £10 million to just £1 million. The Government said that some 80% of business owners realised gains of less than £1 million and would not be affected by this change.

Gains in excess of the £1 million limit (£10 million before 11 March 2020) are taxed at the top CGT rate of 20%. The ER gains allowance is given to both husband and wife separately. This may be an important consideration when structuring shareholdings, particularly following the Budget 2020 changes.

Main Qualifying Conditions

Since 6 April 2019, the following BADR/ER conditions must be satisfied throughout the 24 months before the relevant shares are disposed of. For pre-6 April 2019 disposals, the ER holding period was 12 months.

The seller shareholder must:

  • hold shares in a trading company or holding company of a trading group; and
  • be a director or employee of that company (or fellow group company) and it must be their ‘personal company’


Personal Company:

Director or employee must own at least 5% of the ordinary share capital carrying at least 5% of the voting rights. Importantly, for-post 28 October 2018 disposals, shareholders must also meet one of two alternative 5% economic interest tests.

Most owner-managers should have little difficulty in satisfying the relevant tests. The ‘director/employee’ requirement should not be difficult as there is no requirement to work on a full-time basis.

If a minority and employee shareholders are unable to meet these conditions, they will suffer a higher CGT rate of 20%.

Claiming Business Asset Disposal Relief/Entrepreneurs’ Relief (BADR/ER)

BADR/ER must be claimed by the first anniversary of the 31st January following the tax year of the share sale – ie within (nearly) 22 months after the end of the relevant tax year in which the share sale is made. Thus, for example, a BADR claim on a qualifying gain in 2020/21 must be made by 31 January 2023.

Once claimed, BADR/ER is applied to the complete eligible gain (up to the maximum £1 million (pre-11 March 2020 £10 million) cumulative threshold) – it cannot be restricted in any way. However, selling shares in separate tranches could provide some flexibility, with a BADR claim being made against specific disposals.

Trustees can also claim BADR/ER in certain special cases where their trust has one or more beneficiaries holding an ‘interest in possession’.


FA 2019 extension of BADR/ER holding period for recent business incorporation 

For post-5 April 2019 share disposals, it is possible to include the seller’s qualifying period(s) for BADR/ER before the trade was transferred to the company. (It was not possible to do this before 6 April 2019.) Thus, for the purposes of the 24-month ownership test, a shareholder can now include the period they carried on the trade as a sole trader or in partnership together with the qualifying shareholding period post-incorporation.

However, this ‘aggregation’ rule only applies where the sole trader or partnership has incorporated the trade wholly or partly in exchange for shares. This would typically be under incorporation using TCGA 1992, s 162 relief. On the other hand, where companies are incorporated by gifting the goodwill to the company (using the TCGA 1992, s 165 hold-over relief) or selling the goodwill at market value (with the proceeds being left outstanding on loan account), it will not be possible to use this special BADR/ER ‘aggregation’ rule.


Employment test

It is understood that, when examining BADR/ER claims, HMRC start by checking to see whether there is evidence of the shareholder being employed or an office holder of the relevant company.

In determining whether the seller has the required ‘employment’ status, HMRC may enquire whether the seller has a contract of service.


ER disposals by trustees

Trustees can also claim BADR/ER in certain special cases where their trust has one or more ‘qualifying’ beneficiaries holding an interest in possession over the entire trust fund or part of the trust (eg a ‘sub-fund) which contains the relevant shares (TCGA 1992, s 169J).

Thus, this relief only applies to those trusts where the beneficiary/beneficiaries enjoy(s) an immediate entitlement to the trust income as it arises. However, the trustees do not have their own separate BADR/ER gains allowance. They merely have the opportunity to benefit from the beneficiary’s unused BADR/ER allowance (who must give their consent to the ‘surrender’). There are special rules to deal with cases where there is more than one qualifying beneficiary (see TCGA 1992, s 169O).

The main trust conditions are directed at the ‘qualifying beneficiary’ rather than the trustees. Thus, the trustees can make a claim for BADR/ER provided the qualifying beneficiary

  • is a director or employee of the company (or any fellow-group company), and
  • satisfies the ‘personal company’ conditions – ie holds at least 5% of the ordinary shares in the company (carrying at least 5% of the voting rights) and (for post-28 October 2018 disposals) at least 5% of the relevant economic rights.
There is no shareholding ‘percentage’ requirement for the trustees. These ‘trust’ conditions must be satisfied throughout a period of two years (for pre-6 April 2019 disposals, one year) ending within the three years before the sale (which is different from the normal two years before the sale test for individual BADR/ER claims. The company must also be a trading company or a holding company of a trading group throughout this period.

Although the legislation is not entirely clear, there is a prudent view that the trust must be in existence for at least two years. Arguably, it cannot be the beneficiary’s personal company if the trust is not in existence – since there cannot be a beneficiary without trust.

There is a view that the legislature cannot have intended for trustees to benefit without having ‘clocked-up’ the required BADR/ER ownership period with a qualifying beneficiary (as otherwise trusts would be treated much more beneficially than an individual seller).


Trading company/group test

The ER ‘trading company/group’ test is relatively stringent (TCGA 1992, s 165A). One of the key requirements for BADR/ER on a straightforward company share sale is that the seller must hold their shares in a trading company or a holding company of a trading group throughout the 24 months (or, for pre-6 April 2019 disposals, 12 months) before the disposal date.

For BADR/ER purposes, a trading company qualifies if it carries on trading activities and its activities do not include ‘substantial’ non-trading activities. The trade must be conducted on a ‘commercial basis’ with the view to the realisation of profits.


A company will qualify for BADR/ER where it carries on activities:

  • in the course of, or for the purposes of, its trade;
  • for the purposes of a trade it is preparing to carry on;
  • with a view to its:
  • acquiring or starting to carry on trade;
  • acquiring a significant (ie 51%) interest in the share capital of
  • another trading company; or
  • a holding company of a trading group company; or
  • a qualifying shareholding in a joint-venture company.

provided that this is actually done as soon as ‘reasonably practicable in the circumstances’ (TCGA 1992, s 165A(4), (5), (6)).

A property letting business of furnished holiday lettings (within CTA 2010, s 65) counts as a trade (TCGA 1992, s 241(3)).

HMRC has indicated where a company sets aside funds and receives investment income, this would not prevent it from being engaged ‘wholly’ in trading. However, in such cases, the investment must be closely related or integral to the trading business or represent a ‘short-term’ deposit of funds to meet known future trading liabilities. Furthermore, where a company temporarily holds funds pending their onward distribution to its shareholders, these can normally be counted as a trading activity (IR Tax Bulletin, Issue 62, December 2002).

Potential risk areas that are likely to be regarded as ‘non-trading’ include investment property let to third parties; ‘portfolio shareholdings; loans to directors/shareholders and ‘non-group’ companies and possibly ‘excessive’ cash balances. Investments in ‘joint ventures’ may qualify as trading provided the relevant conditions are satisfied.

To ensure the availability of BADR, a prudent approach should be adopted. This would require, for example, any potentially ‘tainted’ non-trading activities being transferred to a separate company or being retained in the (proprietor) shareholder’s personal ownership.


Determining a company’s trading status for Business Asset Disposal Relief/Entrepreneurs’ Relief (BADR/ER)

The de minimis rule for non-trading activities

A company is permitted to have non-trading activities for BADR/ER provided they do not have any substantial effect on the company’s activities. HMRC interpret ‘substantial’ as more than 20%. Thus a 20% benchmark is effectively applied to a range of potential measures to determine whether a company’s ‘non-trading’ activities represent more than 20% of its business. Under self-assessment, it is up to the taxpayer to decide whether the de minimis threshold is satisfied (see Taxline, March 1999).

All or some of the measures mentioned below would be considered, depending on the facts of the particular case:

  • turnover;
  • the asset-base, including the value of non-traded assets, such as investments;
  • expenses;
  • time spent by management and employees.
Thus, for example, the turnover/sales income from non-trading activities would be compared with the total turnover generated by the company and so on. It may be necessary to build up the correct picture over time and this may involve striking a balance between all these factors (IR Tax Bulletin, Issue 62, December 2002 and see HMRC Capital Gains Manual CG64090).

There is also a view that the profit and loss account provides a better measure of ‘activity’ than a balance sheet, and therefore more weight should be given to a company’s turnover, income and employee costs. The relevant company’s ‘history’ may also be important.

Although the 20% de minimis rule has been adopted by HMRC as their interpretation of ‘substantial’, it should not be taken as a definitive statutory test. Although HMRC invariably analyses the most difficult cases in practice by applying this methodology, it should not unduly restrict the meaning of ‘substantial’, which was intended to be an absolute test rather than a relative one.

If an appeal were taken to the Commissioners on this point it is likely that they would form a qualitative assessment on whether any non-trading activities were ‘substantial’.


Holding company of a trading group

To qualify as a holding company of a trading group for ER/BADR purposes, a two-stage test must be satisfied:

  • the company must be a holding company – ie a company that has one or more 51% subsidiaries (TCGA 1992, s 165A(2));
  • the group must be a trading group, ie, when looking at all its activities together, it must carry on trading activities, although ‘insubstantial’ non-trading activities within the 20% de minimis rule are permitted (TCGA 1992, s 165A(7)).

The statutory definition looks at ‘all the activities of the group’ taken together. This means that all intra-group activities are ignored – thus the letting of property by one (51%) group member to another would be disregarded when looking at the level of non-trading activities. However, this ‘netting-off’ does not apply to transactions with qualifying joint venture companies.


BADR/ER on associated disposals of personally held property

 Where an individual qualifies for the relief on the disposal of shares, they can also obtain relief on associated disposal of an asset that has been used by the company. This would typically be a property that is personally owned by a shareholder/director, which has been used by the company for its business, but it might also cover the sale of intellectual property that is personally held (outside the company) by the seller shareholder.

TCGA 1992, s 169K now requires the following conditions to be satisfied for a qualifying ‘associated disposal’ (in the context of a BADR/ER-related share sale):

  • The seller-shareholder must dispose of their shares in the company, all or some of which are ordinary shares, with minimum disposal of a 5% shareholding in the company (both in terms of ordinary share capital, voting rights, (and for post-29 share disposals) economic rights. For these purposes, disposal within the capital distribution rules in TCGA 1992, s 122 does not count unless it is a ‘liquidation distribution’. Furthermore, there must be no arrangements for the shareholder or someone ‘connected’ with them to repurchase the shares.
  • The seller’s disposal is made as part of their ‘withdrawal from participation’ in the company’s business and there must not be any arrangements in place to repurchase the shares. Arguably, following the FA 2015 ‘5% disposal’ requirement this requirement now appears to be superfluous.

  • Throughout the 24-month period (the 12-month period for pre-6 April 2019 disposals) prior to the sale of the shares, the relevant property has been used for the purposes of the company’s trade.
  • The relevant property must have been held by the seller-shareholder for at least three years.

Condition C above might be quite restrictive in terms of timing. For example, the sale of the property sometime before the share sale may not qualify (since it would not have been used for the purposes of the company’s trade up to the date of the disposal of the shares). In practice, HMRC may be prepared to accept a claim for ‘associated disposal’ relief where the property disposal was genuinely linked to a share sale (despite the fact that the strict CGT disposal date of the property occurred before the sale of shares).


The BADR/ER on associated disposal can be also scaled down on a ‘just and reasonable’ basis to reflect cases where (amongst other things):

  • the property has only been partly used for the purposes of the company’s trade throughout the seller’s period of ownership;
  • rent has been charged (after 5 April 2008) by the ‘seller’ to the company for its use of the property – rent is defined as ‘any form of consideration given for the use of the asset’.

Please contact us if you need any further guidance on this subject.


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