Business Asset Disposal Relief, colloquially known by its former title Entrepreneurs’ Relief, has once again taken centre stage in discussions on tax-efficient strategies for business owners. Designed to allow individuals to pay a reduced rate of Capital Gains Tax (CGT) when disposing of qualifying business assets, the relief is proving increasingly attractive in the run-up to scheduled changes announced in the 30 October 2024 Budget.

A Tool for Efficient Cash Extraction

Business owners often withdraw funds from their companies through dividends or salaries, but these methods can be significantly less tax-efficient. Dividend income can climb to a rate of 39.35%, while salaries may be taxed as high as 45% if the individual meets the relevant income threshold. By contrast, qualifying for Business Asset Disposal Relief can bring the tax rate down to 10%, thus providing a valuable opportunity to extract profits in the form of capital gains rather than income.

Members Voluntary Liquidations (MVLs) often serve as a practical route to achieve this benefit. Under an MVL, any funds received can be treated as capital distributions, potentially triggering Business Asset Disposal Relief if the conditions are met. Although this relief has sometimes been known as “retirement relief,” there is no strict requirement for the individual to retire.

Qualifying Criteria

In order to qualify for Business Asset Disposal Relief, a business or shareholder must generally have been trading for two years. For individuals disposing of shares in a personal company, the company must be a trading entity, and the individual must hold at least 5% of the ordinary share capital and voting rights. The individual must also be entitled to at least 5% of profits and assets on a winding up, or 5% of the disposal proceeds if the company is sold.

This relief extends to sole traders and business partners who have similarly maintained ownership and active operation of the business for at least two years. In cases where a company ceases trading, the disposal of relevant business assets must occur within three years to retain eligibility. The relief carries a lifetime limit of £1 million, in line with the Finance Act 2020.

Impending Rate Increases

Significant rate changes are on the horizon. From April 2025, the concessional rate on gains qualifying for Business Asset Disposal Relief is set to rise from the current 10% to 14%, before increasing again to 18% from April 2026. The 2024 Budget rationale for these staged increases is that it will “allow business owners time to adjust to the changes.” However, many observers note that the impending deadlines may spur some entrepreneurs to bring forward sales or restructuring to secure the existing 10% rate.

It is worth noting that these forthcoming increases will place the relief in line with the lower main rate of CGT, which rose to 18%. Despite the rate hikes, the £1 million lifetime limit for Business Asset Disposal Relief remains intact, underscoring the government’s intention to maintain the relief’s basic structure.

Anti-Avoidance Legislation

Entrepreneurs exploring the benefits of Business Asset Disposal Relief must remain vigilant regarding anti-avoidance provisions. Section 396B of the Income Tax (Trading and Other Income) Act 2005 is designed to prevent the repeated winding up of companies to claim relief. If a new company carrying on the same or a similar trade is set up within two years of the original distribution, eligibility for relief may be forfeited.

Claiming the Relief

Once the relevant conditions are met, individuals can claim Business Asset Disposal Relief through their personal tax returns for the tax year in which the gain arises. Alternatively, claimants may complete form HS275 to disclose their intention to apply for the relief. If the disposal is made after a share issue that dilutes a shareholder’s stake below 5%, it may still be possible to elect to treat the shares as if they were sold and repurchased immediately before the dilution, enabling the shareholder to preserve their entitlement to relief.

Where the qualifying conditions involve shares acquired through an Enterprise Management Incentive (EMI) scheme, the individual must have been granted the option at least two years prior to selling those shares, provided they were purchased after 5 April 2013. If the company ceases trading, shareholders have up to three years to sell their shares to retain the benefits of the relief.

Future Outlook

As the clock ticks down towards April 2025 and April 2026, when the relief’s rates rise to 14% and then 18% respectively, business owners may well be motivated to sell or restructure ahead of schedule in order to lock in the 10% rate currently available. While some critics argue that gradually phasing out the 10% rate will dampen entrepreneurial appetite, proponents suggest that allowing entrepreneurs time to adapt is preferable to imposing abrupt changes.

The underlying mechanics of the relief remain unchanged for now, with the government continuing to emphasise support for enterprise. Gains covered by Business Asset Disposal Relief will still benefit from a preferential CGT rate, though that preferential rate is slowly converging with the main rate. For entrepreneurs preparing to exit or restructure, professional advice is paramount. Ensuring compliance with anti-avoidance rules and timing disposals correctly could make a substantial difference in the amount of tax ultimately paid.

Summing Up

In the broader context of UK taxation policy, these developments signal a gradual tightening of concessions offered to business owners. Yet the fundamental purpose of Business Asset Disposal Relief—to reward risk-taking and investment in trading businesses—remains intact. Individuals contemplating a Members Voluntary Liquidation or a business sale would do well to consider the complexities of the relief well in advance of the new fiscal thresholds.

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