The ‘helpful sidekick’ of Business Asset Disposal Relief (BADR), formally entrepreneurs’ relief, has been hiding in the wings for three years. It is a CGT disposal relief, which can be seen as a useful net to catch investors who may not be able to benefit from BADR, Enterprise Investment Scheme (EIS) or The Seed Enterprise Investment Scheme (SEIS).
Why you may not have seen the relief in action
Claims for the relief are only available to shares subscribed on or after 17 March and subject to the three-year holding requirement. The first time the relief can be seen in action will be on relevant disposals made in the tax year ended 5 April 2020 onwards.
Where to start
Unlike BADR, this relief is only available to the subscriber of ordinary shares. It will be necessary to determine whether the disposal is a qualifying share, a potentially qualifying share or an excluded share for the purposes of this relief. Like BADR, this relief is only available to individuals or trustees of a settlement (see TCGA 1992, s 169VH – s 169 VT on a further condition).
- A qualifying share is one which was subscribed for and fully paid up in cash at the time of issue on or after 17 March 2016 in a company which, at the time, was not listed on a recognised stock exchange. The company needs to be a trading company or holding company of a trading group. Unlike BADR, this requires the investor or person connected with the investor not to be a relevant employee in the company at any time during the shareholding period. The investor also needs to have held the shares during the entire shareholding period. Finally, this needs to be held for at least three years.
- A potentially qualifying share is the same as a qualifying share except that the shares were held for less than three years, beginning with the date the shares were issued.
- An excluded share is neither of the above 2.
Watch out
Like many reliefs, always read the small print. A few to get you started:
- The 3-year clock. If the shares are subscribed for between 17 March 2016 and 5 April 2016, then the 3-year clock starts from 6 April 2016 – If the shares are subscribed for on or after 6 April 2016, then the 3-year clock starts from the date the shares were issued.
- Similar to EIS and SEIS, any value received can be subject to a disqualification.
- Shareholdings may only be partially built up of qualifying shares; it will, therefore, be necessary to apportion the gain, so only part of it is covered by the relief. See TCGA 1992, s 169VD, which provides a fraction which should be applied.
- Where there has been a part disposal of shares, it will be necessary to identify qualifying shares, potentially qualifying shares and excluded shares. Depending on whether a claim in a previous disposal was made, there is an order for how the shares are identified. See TCGA 1992, s 169VE – s 169VG.
- Consideration is needed if there is a reorganisation or reconstruction to ensure relief is not lost. See TCGA 1992, s 169VN.
Don’t forget to claim
Qualifying gains can benefit from a CGT rate of 10% up to £10 million. A claim will need to be made on or before the first anniversary of 31 January following the year of assessment in which the disposal is deemed to have been made.
Practical tip
Investors may deliberately choose to not claim the relief and instead offset the gain against any available capital loss.
