Could it really be scrapped and why is this known as the “UK’s worst tax break”?
Ever since Chancellor Rachel Reeves refused to rule out changes to Capital Gains Tax (CGT) and other expensive but useful advantages, a consensus has formed around the idea that these could be the last days of Business Asset Disposal Relief (BADR).
Rebranded from entrepreneurs’ relief in 2020, BADR allows some directors to benefit from a CGT rate of 10% on the sale of certain business assets up to a maximum of £1 million of capital gains in their lifetime.
Most commonly claimed by business owners on the sale of shares in their business, it allows them to potentially benefit from a £100,000 tax saving.
The loophole used to be even more generous before 2020 when it could have provided a tax saving of up to £1 million. Although the history of BADR can give us some insight into why many analysts already assume that its days are numbered before the October 30th Budget.
In October 2007, then Chancellor Alistair Darling used his pre-Budget statement to announce the introduction of a flat rate of CGT of 18%. This was to come in at the same time as taper relief was scrapped.
In response to criticism of the latter move, he announced the creation of entrepreneurs’ relief in January 2008 which is the forerunner of BADR.
Despite being in existence for 16 years, Sir Edward Troup, former head of HMRC and part of a panel of advisors reporting to Chancellor Rachel Reeves on modernising the tax authority said it had “minimal impact on encouraging entrepreneurship in the UK. The point of entrepreneurs’ relief is that it rewards you when you make a lot of money.
“There are lots of things getting in the way of people becoming entrepreneurs in this country, but the fear of tax on future gains is not one of them.”
Based on the latest HMRC estimates, BADR costs the Exchequer approximately £1.5 billion annually which would make it a ripe target for a Chancellor committed to savings.
If this is too drastic then there could be other compromises such as halving the lifetime limit to £500,000, although this would only save half a million pounds so might not be enough to go towards a publicised £22 billion shortfall in savings targeted.
Chris Horner, insolvency director with BusinessRescueExpert, said: “With the October 30th budget approaching, speculation is rife about what changes will be coming to taxes and reliefs.
“Accountants will tell you that the scrapping of BADR for instance would likely have more of a disproportionate impact on small business owners and members of management teams that have been incentivised with shares or share options.
“It’s a misconception that CGT and BADR taxpayers have the broadest shoulders so it won’t be problematic if it’s reduced or discontinued. It will affect directors and business owners.
“But many will consider that with a choice between a rise in the rate of CGT and the potential scrapping of BADR, many entrepreneurs would take the deal and be prepared to sacrifice one relief for a reduced version of the other.
There are just six weeks until Chancellor Rachel Reeves unveils her plans and changes in her maiden budget statement and while we don’t know for sure what’s coming, we’ve got a pretty decent idea.
It’s not going to be good news for any director or business owner who’s planning to finally take advantage of CGT as part of their exit strategy by closing their business through a members voluntary liquidation (MVL).
Unless they start the process before any announcement is made or any laws are changed.
Get in touch with us today and we’ll arrange a convenient and free initial consultation to discuss how you can take advantage of the current rules with an MVL.