Why directors will need to act sooner rather than later

Many directors are unaware of the implications of the rise in Business Asset Disposal Relief (BADR) coming in April this year and how it could impact them and their future business decisions. 

In this blog we’ll take a closer look at what BADR does and what directors can do to mitigate these changes. 

Since 2003, when the original “retirement relief” provisions were abolished, directors and shareholders have enjoyed some form of 10% Capital Gains Tax (CGT) rate on their business and share disposals.

The latest incarnation is provided by BADR, previously known as Entrepreneurs’ Relief. The rate has been 10% since 2008 but changes announced in the Autumn Budget of 2024 means that the value will be reduced both this year and next year. 

The Chancellor has taken some stick over the move but owners and shareholders have already seen a large reduction in the amount of gains qualifying for BADR and tightening of BADR conditions in recent years anyway. 

In 2020, the most drastic recent change came when the amount of relief potentially available was reduced from a £10 million lifetime limit to just £1 million. In addition to this in 2019 the BADR qualifying period through which all the relevant BADR conditions must be satisfied was extended to a minimum period of two years up to the date of disposal.

BADR qualifying conditions for directors

There are certain current eligibility qualifying conditions for shareholders and directors that have to be met in a two year period before a share disposal. 

These are:-

  • They have to own shares in a qualifying trading company or holding company of a trading group. (80% of this company/group’s activities has to be trading based on various other measures such as sales, expenses and employee/management time)
  • Be a director or employee of that company (or group company). Note there is no requirement that they have to work on a full-time basis but part-time hours would be sufficient.
  • Must hold shares in their personal company. This means, in turn, that they must own at least 5% of the company’s ordinary share capital carrying on at least 5% of the voting rights and must also meet one of two alternative 5% economic interest tests. Sellers must meet these requirements in their own right – holdings and voting rights held by their spouse or other close associates or relatives cannot be included.

Autumn Budget changes

The main CGT rate was increased to 24% for disposals after October 29th 2024 but the 10% BADR rate was kept in place until April 5th 2025.

The new proposed BADR rates are:-

  • Tax year 2025/26 – BADR rate increases to 14%
  • Tax year 2026/27 – BADR rate increases to 18%

Anti-forestalling

With every tax rate increase or other adverse tax change there are more anti-forestalling provisions brought in. This happened again with the introduction of a general CGT anti-forestalling rule for assets sold after October 29th 2024 under unconditional contracts entered into before that date.

Under normal circumstances, the date the unconditional contract is entered into would be the CGT disposal date (as set out in section 28 Taxation of Chargeable Gains Act (TCGA 1992)). If the anti-forestalling rule applies, the CGT disposal date switches to the date of completion (and hence subject to the higher CGT rates).

There’s a useful rule that enables sellers to retain the normal CGT disposal date, such as the date of the contract. They can invoke this “get-out” if they had not entered into the transaction to benefit from the lower CGT rate.

Unless the seller’s gains are less than £100,000, they must provide clear evidence. Where parties to the deal are connected, it must be shown that the contract was entered into for entirely commercial purposes.

These rules are applied in the same way in the context of transactions designed to secure the lower rate of BADR, in the context of the phased increase in the BADR rate. 

Essentially, contracts which straddle the increase in rates at April 5th 2025 and April 5th 2026 must demonstrate their commerciality, as opposed to purely seeking a BADR advantage.

The message is getting through

The latest tax receipt data for December saw increases across the board. 

Capital Gains Tax receipts more than doubled annually compared to the total in December 2023. £335 million was raised last month, an increase of £179 million on the £156 million taken in 2023.

Over the last financial quarter (Oct-Dec 2024), CGT hit a record £808 million, which is an increase of 60% from the £505 million taken in the same quarter the year before.

In fact extra revenues started to flow into the Treasury in October even before the budget was announced as savvy directors understood that CGT rises were predicted and continued into November as the CGT take for these two months alone was £130 million higher than the same period in 2023.

Accelerating exit plans

The future reductions in CGT savings from BADR changes means that more directors will accelerate their exit plans by looking to close their businesses through a solvent liquidation process like a Members Voluntary Liquidation (MVL). 

There will be renewed focus on CGT and BADR in the next couple of months before the changes take effect but this will be more than enough time for directors to execute their exit strategies and take advantage of a more favourable tax environment. 

If you’re still considering your next move then get in touch with us to arrange a free chat.

We can run through all the scenarios with you based on your company’s financial position and give you a clearer picture of what options you have available to you and the relevant timescales associated with them. 

Nothing moves faster than time so take advantage while you can.