Succession And Capital Gains Tax
Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, is a very useful Capital Gains Tax relief for family businesses.
It has the effect of reducing the Capital Gains Tax rate on qualifying disposals to 10%, from the main rate of 20%.
Whilst beneficial for the sale of a business or assets to a third party, it should also be considered when discussing succession planning for an incoming generation.
For example, many businesses encounter the situation where parents are wishing to start passing responsibility and ownership down to the next generation and, at the same time, wish to generate some cash to provide themselves with funds for retirement. In this situation many individuals may sell personally held assets, such as land, usually subject to a considerable Capital Gains Tax liability.
However, it is possible to reduce the tax liability by utilising BADR, in this circumstance by ensuring that the land sale qualifies for relief by selling it in conjunction with gifting part of their interest in the business (at least 5%) to the next generation.
Gifting an interest in the business can itself create a Capital Gains Tax liability. It would however likely be eligible for Holdover Relief meaning no Capital Gains Tax may fall due on the gift.
In essence, the parents could achieve both their cash generating and succession goals by gifting at least 5% of the holding to their children in conjunction with a sale of the land subject to Capital Gains Tax at just 10%.
The tax saving created by the relief could reduce the amount of land that needs to be sold or can simply increase the proceeds after tax, providing additional funds for retirement or perhaps a cash injection for the business.
BADR can apply in a range of other scenarios as well. There are a raft of conditions to satisfy to qualify for BADR, some of which need to be satisfied for 2 years. As always, it's important to plan ahead to make the best of the position for the family and for the business.