Business asset disposal relief - a raw deal for entrepreneurs

Business asset disposal relief (BADR, formerly entrepreneur’s relief) is an important relief from capital gains tax (CGT), which applies a 10 per cent CGT rate rather than the current main rate of 20 per cent, to the first £1m of lifetime qualifying gains by individuals, therefore creating a tax saving of up to £100,000.

The current situation

The BADR lifetime limit was reduced from £10m to £1m for disposals made on or after 11 March 2020, thereby considerably reducing the available tax saving. This begs two questions: who is BADR aiming to serve? and, are the objectives of this relief really being met?

For longer-term passive investors, a range of attractive tax reliefs is available, including the enterprise investment scheme (EIS), the seed enterprise investment scheme (SEIS) and investors relief amongst others. Yet it is not these investors that are often putting their homes or their livelihoods on the line to raise funds to start and build a business.

The coronavirus pandemic became the catalyst for a ‘start-up’ revolution as many of those that were furloughed plucked up the courage to go out on their own, and so now feels like the right time to assess whether BADR remains fit for purpose.

Is there relief for the main risk-taker?

In a report issued in November 2020, the Office of Tax Simplification (OTS) opined that BADR, ‘is mistargeted if its objective is to stimulate investment and risk-taking by business owners.’

For many people starting out in business, an eventual sale of that business may feel very distant and therefore a potentially uncertain reduced tax rate on any gain arising on a future disposal is unlikely to be a compelling reason to take investment risk. Instead, the OTS considers that risk-taking would be better encouraged by a smaller upfront tax relief, akin to the popular EIS and SEIS reliefs that are currently unavailable to those connected with qualifying companies, including directors, employees and individuals holding a significant interest.

What is more, the CGT reliefs available to EIS and SEIS investors typically encourage repeated investment, so would introducing a similar type of relief for entrepreneurs achieve more by way of stimulating investment in the UK economy?

What is the solution for those looking to retire?

Whilst an EIS style relief could be the answer for the go-getters of today, an abrupt end to BADR is unlikely to serve those looking to retire and cash-in on their business and benefit from up to £100,000 of relief that is currently within touching distance.

The OTS has also raised concerns that the minimum 5 per cent shareholding and 24 month holding period requirements may be counterproductive in their attempt to target BADR at true entrepreneurship and can distort behaviour. For example, a company board keen to raise additional external funding or for a founder shareholder to move on may be met with that shareholder insisting on retaining at least a 5 per cent shareholding to preserve their entitlement to BADR on an eventual sale.

The OTS goes on to suggest that if the minimum shareholding requirement was increased to 25 per cent, or the minimum holding period increased from 2 years to 10 years, this may better target genuine owner-managers rather than short-term passive investors.

Careful changes needed to improve the incentive effect

Any further restrictions in the BADR rules, combined with a potential increase in the main rate of CGT, which has repeatedly been feared, could be severely detrimental to many business owners and the Government will need to be mindful of those that could, at least in the short term, potentially lose out. In the meantime, we would encourage business owners to keep abreast of any proposed changes which may impact them.

For more information, please get in touch with Nicole Sharples, or your usual RSM contact.