Here, our simple guide summarises the elements of business asset disposal relief that are likely to be relevant to contractors, consultants and freelancers working through their own Ltd companies.
Previously known as Entrepreneurs relief (prior to 6th April 2020), business asset disposal relief is an allowance that can reduce the rate of capital gains tax to an effective rate of 10% when businesses, and other qualifying assets, are disposed of.
Who can benefit from business asset disposal relief?
In order to qualify for this relief when selling either part or all of your business you must have been either a sole trader or business partner for at least two years, up to the date of sale. You must also have owned the business for at least two years.
The same applies to the cessation of trade and winding up of a Ltd company, under certain circumstances. Your business assets must also be disposed of within three years.
Business asset disposal relief can also be available when disposing of other assets, such as shares acquired through Enterprise Management Incentive schemes, for example.
Conditions for business asset disposal relief
For the relief to apply, the following conditions need to be met:
- The reasons for stopping to trade through the Ltd company must be for genuine commercial reasons.
- The company should be a trading company in the twelve months prior to disposal. If the company stops trading, you can still qualify for business asset disposal relief if you dispose of your shares within 3 years.
- The shareholder claiming the relief must have held 5% or more of the share capital of the company for a minimum of two years, and those shares must bring with them at least 5% of the voting rights (any additional shares acquired over the 5% within the final 12 months are still eligible).
- The shares must have been owned for a minimum of two years.
- The shareholder claiming the relief must also be an employee or officer of the company and must have been so for a minimum of two years.
Winding up a Limited company
A Ltd company with distributable reserves of £25,000 or less can be wound up informally by application to Companies House. However, for companies with remaining distributable reserves greater than £25,000, it is necessary to appoint an insolvency practitioner to formally liquidate the company via a members’ voluntary liquidation (MVL). You can find out more about winding up your Ltd company here.
If you are a client of Integro Accounting your accountant will be able to guide you through the MVL process and introduce you to a licensed insolvency practitioner who can complete the liquidation for you.