BADR - is there a problem for cash-rich companies?

BADR

Despite the hike in capital gains tax (CGT) rates announced in the 2024 Autumn Budget, business asset disposal relief (BADR) can still save business owners significant sums of tax when they sell or close their businesses. Gains made on or after 6 April 2025, up to £1 million (this is a lifetime limit), are charged at a maximum of 14% (10% before 6 April 2025) compared with 24% where BADR doesn’t apply. However, conditions apply.

Main conditions for share sales

BADR can apply to gains made from the sale of shares, or sums received on winding up in a company if:

• you were an employee or director of the company, or one in the same group
• the company’s (or group’s) main activities are trading and any non-trading activity, such as owning and managing investments, isn’t substantial.

The second of these conditions often raises questions about eligibility for BADR.

Cash in the company

What counts as substantial non-trading activity isn’t explained in the CGT rules. HMRC has a longstanding view that anything more than 20% of a company’s activity is potentially substantial. This is generally accepted but is by no means set in stone and allows room for discussion.

How much is too much?

When measuring the 20% benchmark HMRC considers:

• the level of income from non-trading activity
• the value of non-trade-related assets
• the time and effort devoted to managing the non-trade assets and generating the income from them; and
• the company’s history, i.e. how long the non-trading activities have been present.

The last point is especially important. For example, an actively managed and substantial share portfolio might involve considerable time and effort relative to a company’s overall activities, while simply holding money in one or more interest-bearing accounts would not. So, if the cash investments of a company were of the latter type only they ought not to interfere with BADR even where their value significantly exceeds 20% of a company’s assets.

HMRC’s guidance on this point is helpful and therefore worth reading, as is the judgment in Jacqueline Potter and Neil Potter v HMRC [2019].

Ensuring BADR

If you’re worried about the level of savings and investments in your company preventing BADR from applying to gains you’ll make from selling your shares or winding up the company, it’s worth getting HMRC’s view.

In cases of doubt over BADR you can apply to HMRC for a “non-statutory clearance”. This will indicate HMRC‘s view on whether it applies. Even if it’s negative this will allow you to take steps to rectify the issues preventing BADR from applying.