Business Asset Disposal Relief: Should I sell my business before April?

In the Autumn Budget of 30 October, the Chancellor announced an increase in the Capital Gains Tax (CGT) rate on the disposal of assets qualifying for Business Assets Disposal Relief (BADR) from the current 10% rate to 14% from April 2025. The rate will increase further to 18% in April 2026.  This compares to the CGT rate of 24% for higher rate taxpayers.

For business owners who are considering an exit from the business, now would be a good time to sell.  The £1m lifetime allowance is unchanged.

Do I qualify for the relief?

1. If you are selling your business, you must satisfy the following conditions for the two years ending with the date of sale:
   1. You must own a trading business as a sole trader or business partner (so ownership of investment assets – e.g., property assets – will not qualify); and
   2. You must have owned the business for at least two years.
2. Alternatively, if you are selling shares or securities, for the two years prior to the sale, you must meet these requirements:
   1. You are an employee or office holder of the company; and
   2. the company’s main activities are trading (rather than investment), or it is the holding company of a trading group.

Timing of the disposal for CGT

The time of disposal for CGT purposes is the date when the contract is signed or when the contract becomes unconditional, rather than when the contract is completed.  This could provide a tax planning opportunities for individuals to “lock in” current rates and so to counteract this, the Government has introduced anti-forestalling rules.  

Under the anti-forestalling rules, where an individual transfers an asset after Budget Day pursuant to an unconditional contract in place before Budget Day, they can only apply the pre-Budget Day CGT rates if:

• the parties can show that they did not enter into the contract with a purpose of obtaining a tax advantage by fixing an early disposal date under CGT rules; and
• where the parties to the contract are connected, they entered into the contract for wholly commercial reasons.

If the gain is over £100,000, the parties must make a claim if they wish for the old CGT rates to apply.

Share for share exchange

Where shares are the subject of a share-for-share exchange (i.e. shares in one company are sold in exchange for shares in a different company), rollover relief generally applies to ensure that it is capital gains tax neutral (with any capital gains payable at the time of disposal of the new shares).  However, prior to the sale of the new shares, an individual may elect out of rollover relief and pay CGT on the gain realised on the sale of the old shares at the point of the share for share exchange. 

Where a share for share exchange took place on or after 6 April 2023 but before Budget Day, and as at Budget Day the individual had not elected out of rollover relief, the anti-forestalling rules apply the rate of BADR prevailing at the date of any subsequent election (and not the date of the share for share exchange). This gives individuals an opportunity between Budget Day and 5 April 2025 to claim the existing 10% BADR relief rate on a pre-Budget Day share for share exchange by electing out of rollover relief and crystallising the gain prior to 5 April 2025.

Making an election and crystallising the gain will, however, lead to a “dry” tax charge where there is tax to pay but no proceeds of sale with which to pay it.

Is it time to sell your business?

If you have identified a suitable buyer, and if you have agreed the heads of terms with the buyer with finances in place, then you have time to complete the sale by 5 April 2025. In short, the answer is probably yes.

Are there any downsides to selling your business now?

Buyers will be aware of the benefit to the seller if they complete the sale before April 2025 and may seek to use this as a bargaining chip.  For example, buyers might seek a lower purchase price, more warranties and indemnities, and to have a greater percentage of the purchase price paid with deferred consideration or by way of an earn-out rather than with upfront cash. These would be points for negotiation.

The Birketts view

You have a narrow window now until 5 April 2025 to sell your business and benefit from the 10% CGT rate.  However, you need to consider the transaction as a whole, both commercially and in the context of your wider estate planning. Do get in touch with us soon if you would like to sell your business as you will need to act quickly to bank the 10% rate.