Business asset disposal relief (BADR) may now be a pale shadow of what it once was, but it remains a useful relief for small businesses.
My attention was recently drawn, inadvertently, to a fundamental BADR issue by a client firm.
Asset Used by A Sole Trader
We had been discussing BADR in the context of the disposal of a property used by a company and whether BADR would apply. It was understood that the asset needed to remain in use for the purposes of the business at the time the business ceased.
That was the fundamental issue which I was obliged to clarify as we were mixing up our apples with our oranges and pears: our ‘apples’ being an asset used in a sole trader’s business and our ‘oranges’ and ‘pears’ being, respectively, an asset used by a partnership or a company. There is no crossover between our apples and our other fruit – the rules are almost completely separate.
The BADR legislation (TCGA 1992 s 169I(2)) firstly identifies the three categories of business assets as:
- a disposal of the whole or part of a business;
- a disposal of assets used for the purposes of a business at the time it ceases; and
- a disposal of company shares or securities.
However, subsection (4) of the above legislation clarifies that a disposal within (b) must be owned by the individual throughout the two years ending with the disposal. It follows that (b) can only apply to an asset used in a sole trader’s business.
Companies And Partnerships
If the asset is used in a business carried on by a partnership or a company, the disposal can only qualify for BADR as an ‘associated disposal’ within s 169K, as being associated with a relevant material disposal of an interest in the partnership or company.
That makes matters considerably more complicated and, in some ways, rather nebulous. That said, the basic principles are easily understood:
- There must be a disposal of at least a 5% interest in the assets of the partnership or of ordinary shares in the company.
- The disposal must be made as part of the individual’s withdrawal from participation in the business of the partnership or the company.
A partnership business is treated as owned by each individual who is a member of the partnership, so the disposal of the partnership interest itself is a disposal within (a) above.
In the case of a disposal of shares within (c), as well as holding a minimum of 5% of the ordinary shares (to meet the ‘personal company’ test), the individual must also be an officer or employee. Again, the relevant conditions must be met for a period of at least two years ending, normally, with the disposal.
What is unclear, however, is what is meant by ‘withdrawal from participation in the business’, as the legislation is silent on this point. Probably the main ‘takeaway’ from HMRC guidance in its Capital Gains Manual at CG63998 is that the disposal of the asset in question must be related to the reduction of the individual’s interest in the partnership or company, and that both need to happen around the same time.
The guidance accepts that ‘It is not necessary for the individual to reduce the amount of work which they may do for the business’. and goes on to give a couple of examples. So, not much of a withdrawal at all then really, but it is a question of fact and must depend upon the precise circumstances.
Practical Tip
I have always considered that for such a relatively short piece of legislation (though now grown somewhat), BADR presents quite a few conundrums. This is why I would urge practitioners to work from the legislation rather than assumed prior knowledge, and for other readers to take professional advice instead of relying on their own research.