An individual disposing of business assets may be able to reduce the Capital Gains Tax (CGT) they have to pay on 'qualifying disposals' by claiming Business Asset Disposal Relief (BADR) (called Entrepreneurs' Relief (ER) prior to 6 April 2020). The rate of CGT on qualifying disposals is 10%.

For an individual who is a partner, a qualifying disposal can be:

• the disposal by the individual partner of the whole of their interest in a partnership;
• the disposal by the individual partner of part of their interest in a partnership;
• the disposal by the partnership of the whole or part of the partnership business; or
• the disposal after the partnership business has ceased of assets used for the business.

A sole trader who takes on a partner can also claim BADR in respect of the gains on disposing of a share of the assets of the business carried on as a sole trade.

A partner can also claim BADR on an 'associated disposal' of an asset owned personally and used in the partnership business. The associated disposal must be linked with the qualifying disposal of at least a 5% share in the partnership assets unless the claimant disposes of the whole of their interest and has previously held a larger stake.

No claim for BADR can be made in respect of shares or other assets held by the business as an investment.

Nor can a claim for BADR be made to reduce capital gains tax on the disposal of internally generated goodwill to a close company unless:

• immediately after the disposal, the person meets none of the 'personal company' conditions in the case of the close company or any company in a group of which the company is a member, or
• within 28 days of the disposal (or such longer period as HMRC allows) the person and any connected company or trust have sold all of their shares in the close company to another company in which, if it is a close company, the person and any connected company or trust together hold fewer than 5% of the ordinary shares and less than 5% of the voting rights.

The purpose of this provision is to prevent the extraction of funds from the business at a low rate of CGT instead of the normal rates of income tax and national insurance contributions.

Any type of disposal can qualify for BADR, including a:

• sale;
• gift;
• transfer at undervalue; or
• capital sum derived from an asset.

Investors can benefit from both BADR and the deferral of gains reinvested under EIS. This means that gains which are eligible for BADR at the time of the original disposal, but which are instead deferred into investments qualifying for EIS can benefit from BADR when the gain is realised, for example when the shares are sold.

For disposals made on or after 11 March 2020 the lifetime limit for BADR (including earlier claims for ER) was reduced from £10m to £1m. Anti-forestalling provisions for disposals made on or after 11 March 2020 apply where attempts are made to lock in the previous £10m lifetime limit through the use of:

• unconditional contracts;
• reorganisations of share capital;
• exchange of securities etc.