making the most of business disposal reliefs

If you are a company owner planning to sell your business in the future, you can make sure that the chargeable gain on your shares is taxed at 10% rather than 20% – in other words that the disposal qualifies for business asset disposal relief (BADR).

There are several conditions for the relief and one of them has recently been the subject of a decision in the Upper Tribunal. As a result, HMRC has had to rewrite some of its guidance.


A company must be a trading company for its shares to qualify for BADR. A trading company is one whose activities do not include “to a substantial extent, activities other than trading activities”. HMRC’s definition of ‘substantial’ before this ruling had been “more than 20%”. HMRC’s previous guidance on calculating the percentage of trading activity recommended the consideration of three main factors:

  • income from trading and non-trading activities;
  • the value of trading and non-trading assets; and
  • expenses incurred and time spent by officers and employees of the company on trading and non-trading activities.

However, the Upper Tribunal found the test and the application of a strict numerical threshold too prescriptive. It said the factors to which the HMRC guidance refers should not be regarded as individual tests but just matters that must be weighed up in the context of the individual case. ‘Substantial’ should be “taken to mean of material or real importance in the context of the activities of the company as a whole”.

Any examination must look at the nature of the company’s activities and consider how best to measure their extent. The test should be both qualitative and quantitative. HMRC’s rewritten guidance places less emphasis on a 20% test, which it now suggests may only be relevant when considering the company’s non-trading income and assets.

The Tribunal decision may create some uncertainty where companies have some non-trading activities. Business owners may prefer to err on the side of caution and keep any significant non-trading activities separate from their trading company. You should, of course, also make sure you satisfy all the other conditions for the relief, so any company sale should be planned well in advance. There is a lifetime limit of £1 million of gains that can qualify for BADR.

IHT mitigation

If you do not intend to dispose of your business, your heirs will want its value to qualify for business relief for inheritance tax, given at 100% for unlisted company shares or a business or interest in a business. The term ‘business’ is wider than trade, but businesses that consist wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments are excluded. Where a business contains a mixture of excluded and non-excluded activities, there is no single test for determining whether its activities are ‘wholly or mainly’ excluded.

Where a business passes the ‘wholly or mainly’ test, some of its assets may nevertheless not qualify for relief if they are not being used in the business at the time of the owner’s death. It may be difficult, for example, to claim relief for large sums of cash in a business account. As with BADR, careful advance planning should avoid any unpleasant surprises.

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