No trading means no BADR

Business asset disposal relief (BADR) replaced Entrepreneurs’ relief (ER) in 2020.

It operates in essentially the same way, but with a greatly reduced lifetime limit of gains eligible for the relief. The current limit allows £1m of gains to be taxed at 10% rather than the normal 20%, so potentially saves £100,000 of CGT. Among the conditions for a disposal of shares to qualify are:
● the person making the disposal must be an officer or employee of the company
● the company must be a trading company (or holding company of a trading group); and
● the individual must own (broadly) 5% of the shares.
Other conditions apply and all conditions must be met for a minimum of 2 years up to the date of disposal. The relief is also available if a previously trading company is liquidated within 3 years of ceasing trading, subject to conditions.

Note that this CGT relief is never available to investment businesses.

Such as property rental companies; being a commercial business is not the same as trading, at least for tax purposes! The Tax Tribunal has recently heard a case where the owners of a company sought to show that it had changed from being an investment company to a trading company. The company’s only asset was aparcel of land, which included a protected site. The original intention, at the time of acquisition, was to maintain the site as an investment.
After acquisition, the protections over the site were lifted and the site was identified as suitable for mixed-use development. The company sought major planning consents for change of use. With a view to the site’s onward sale, and appropriated the site to trading stock for accounting purposes in December 2013. A third party purchased the site on 18 January 2016. The company entered members’ voluntary liquidation on 11 March 2016 and the three shareholders received distributions in the liquidation. They claimed ER on the distributions received, on the basis that the company had commenced trade in December 2013. When the change of intention occurred. HMRC disagreed, stating that no trade ever came into existence.
The Tribunal decision was that the company was investing in land rather than dealing in land.

It was not a trading company because:

● It did not intend to carry out a development or do anything that would make a significant change to the site.
● The company had changed its plans, as it no longer wished to hold the site as an investment. However, appropriating the site to trading stock cannot have any tax significance if the company was not actually carrying on a trade.
● The company did not have the expertise or funds itself to carry out the development identified and, if it were to be trading, needed to do something more than simply deciding to sell the asset. ER was therefore not available to the shareholders.
Whether or not a company is trading is crucially important to many tax reliefs, not just BADR. Unfortunately, it is not always clear-cut, with many cases ending up at tax tribunals. Never assume that your disposals will benefit from a tax relief. Particularly if the company’s activities might be classified as investing. We can help you with any concerns you may have in this area.