Do I qualify for business asset disposal relief?

When you sell (or dispose of) all or part of your business, you may be able to pay less capital gains tax. This is known as business asset disposal relief.

Perhaps you’re considering selling your limited company to fund your retirement or because you’re facing challenges with IR35 rules. Read on to find out if you qualify for business asset disposal relief and save money on your tax bill.

• Autumn Budget: what was announced for small businesses?
• What does being inside IR35 mean? A guide for the self-employed
• What is equity in business?
• What does professional indemnity insurance cover?

What is business asset disposal relief?

Business asset disposal relief is the amount of capital gains tax you have to pay when selling a business. Bear in mind, this can also include any gains you get from swapping, gifting, or compensation.

This relief was previously known as ‘entrepreneurs’ relief’ but was changed by the government on 6 April 2020 in a bid to raise money for other spending pledges. These entrepreneurs’ relief changes mean sellers now pay 10 per cent on lifetime gains of up to £1 million rather than the previous limit of £10 million in a lifetime.

How does business asset disposal relief work?

The relief provides a discounted rate of capital gains tax, which means you’ll pay 10 per cent on all gains on qualifying assets (rather than the standard 20 per cent for higher rate and additional tax payers).

To be eligible for the relief, you must have owned your business for at least two years and be a sole trader or business partner.

How much do you pay?

If all your gains qualify for business asset disposal relief:

1. Work out your gain on qualifying assets (difference between what you paid for your business and what you sold it for)
2. Add together the gains (and deduct qualifying losses)
3. Deduct your tax-free allowance (£12,300 or £6,150 for trusts)
4. Pay 10 per cent tax on what’s left

You’ll claim the relief when you file your Self Assessment tax return.

Business asset disposal relief limit

You can claim a total of £1 million in business asset disposal relief in your lifetime. For anything over this amount, sellers will be charged the standard capital gains tax rate of 20 per cent.

The limit is based on how much you can claim as an individual, rather than for each business you sell.

How else can you claim business asset disposal relief?

As well as if you sell your business, you can claim business asset disposal relief if:

• you’re closing your business – and sell assets from it within three years of closing it down. Read more about how to wind up a company
• you’re selling shares or securities – and you control at least five per cent of the business’s shares, voting rights, and assets
• you’re selling shares from an enterprise management incentive – and you bought the shares after 5 April 2013 and were given the option to buy them at least two years before selling them

What if I don’t qualify?

If you don’t qualify for this relief, you’ll need to work out the total taxable gains you’ll get when you sell your business.

Our complete guide to capital gains tax has more information on the different tax rates and how to work out what you’ll need to pay.

Landlords should note that the sale of property doesn’t qualify for this relief, unless it’s a furnished holiday lettings business in the UK or European Economic Area. If you’re a landlord with a property portfolio, you can find out more about filing a landlord tax return.

Find out more: our tax and Self Assessment resource has a range of tips and guides to help you run your small business.

As tax is a complicated subject, please use this as a guide only and speak to a professional about your individual circumstances. You can also find out more on the UK government website.

Do you want to know anything else about business asset disposal relief? Let us know in the comments and we’ll do our best to help.

Photograph 1: Drazen/stock.adobe.com