Labour’s first Budget in 14 years has made major changes to Business Asset Disposal Relief (BADR) meaning these wishing to sell or exit a business face significantly greater exposure to Capital Gains Tax.
So what has changed and what will it mean for those wishing to sell a business and for family businesses where succession is vital to its future success?
BADR, previously called Entrepreneurs Relief, offers individuals a lower rate of CGT when selling shares in a business. It has always been a valuable relief, rewarding individuals who have invested considerable time, cash, effort and energy in building a business.
That relief is now a little less generous.
From 6 April 2025, the CGT rate that applies to BADR will increase from 10% to 14% and then to 18% from 6 April 2026. The Chancellor did, however, leave the £1m lifetime limit on gains alone.
To qualify for BADR, a business owner or shareholder must have met the following conditions in the two years preceding the sale:
• Be an employee or officer of the company;
• Hold at least 5% of the company’s shares and entitled to exercise 5% of voting rights; and
• Be entitled to 5% of distributed profits, 5% of the company’s assets on winding up, and 5% of the sale proceeds of the company.
How will businesses respond
There was an acceleration and spike in business sales immediately before the October Budget as business owners and shareholders looked to take advantage of the lower CGT rate. We would expect to see another spike in activity to beat the April 2025 increase in CGT.
Family-owned businesses where succession is a priority are more likely to consider gifting shares in the business to the next generation but will need to keep CGT and inheritance tax (IHT) in mind.
A gift of shares is considered a CGT event and will trigger a tax liability, although it is usually possible to defer that tax charge. When gifted to an individual, business asset holdover relief should be available. If the gift is to a trust where the donor is not a beneficiary, it will be possible to claim full CGT deferral.
When gifting shares, it will also be important to consider the IHT implications. If the donor survives for seven years after making that gift, it will fall outside of their estate for IHT purposes.
Where gifts of shares are made it is still possible for the donor to continue to play a role in the business – there is no need to step entirely away from its day-to-day operation. However, remuneration should be in line with duties and commercially justifiable.
Whether selling a business or gifting shares in a family-owned business to the next generation it will always remain vitally important to take early and independent advice, taking into account both the CGT and IHT landscape.
Contact our experts below for more information.