Guest author: Anand Chandarana, Tax Senior Manager, Haines Watts
Any business owner looking to retire or sell their IFA business will want to do so in a way that maximises the return and keeps the proceeds as tax efficient as possible. There are many variables that impact the tax treatment of selling an IFA business, one of which is how your business is set up.
In the article below, Anand Chandarana, Tax Senior Manager at Haines Watts follows up on his recent YouTube series with Gary Venner, CEO of IFA Acquisitions where he discusses how the structure of your IFA business impacts the tax treatment, particularly in respect of whether you qualify for Business Asset Disposal Relief (BADR).
What is Business Asset Disposal Relief (BADR)
Business Asset Disposal Relief (BADR), previously called Entrepreneur’s Relief, is a capital gains tax (CGT) relief. It is available on disposals of business assets and reduces the rate of CGT on qualifying gains to 10%, compared with the current rate of CGT which stands at 20%.
Who qualifies for BADR?
The relief is available to individuals disposing of their personal businesses (sole traders) or their interests in a partnership or Limited Liability Partnership. Corporate bodies such as limited companies, are not eligible for BADR.
However, the relief is available to individuals selling shares subject to qualifying criteria – see below.
The relief is subject to a £1 million lifetime limit on gains. That £1 million is taxable at 10% yielding a maximum potential saving of £100,000 – assuming you haven’t sold a business and exercised BADR since April 2008 (formerly known as Entrepreneurs’ Relief) previously.
What are the broad qualifying criteria?
The business must:
- have been owned by the individual taxpayer throughout the two-year prior to the date of disposal;
- and the disposal must include the whole of the business or, if only part of the business is disposed of, this part must represent a business that is still capable of continuing in its own right.
Or:
- A disposal of business assets within three years of cessation of trade can also qualify.
Sole traders must:
- dispose of whole or part of their business, or
- dispose of business assets on or after cessation
For BADR to be available on disposal of shares or securities, the company must be trading or be the holding company of a trading group.
Individuals who are shareholders of trading businesses must own a minimum of 5% of the ordinary share capital which gives them at least a 5% interest in the voting and economic rights and have been an employee or office holder (e.g. director) of the company for at least 2 years up to the date of disposal.
Maximising BADR for spouses or civil partners?
Potentially, in the case of married couples or civil partners, where each party has a shareholding of 5% or more, both individuals could qualify individually for BADR. However, both individuals need to work in the business.
With the right planning in advance of exit or sale, the party who has not historically been actively involved in the business, can be brought into the business for example as a director or company secretary and thereby qualify for BADR. However, they have to have held the post for at least two years prior to sale. So as with all considerations around exit, planning three to five years in advance enables you to be in the best possible tax position on exit.
BADR on sale of clients
In many IFA businesses, a sole trader may be a registered individual of the business who owns their own client portfolio. But these individuals are also interacting with their clients as a representative of the business.
Without the right structuring and contracts in place, there is a risk that BADR is may not be available on the sale of the client bank.
This is another good example of where planning with exit in mind right from the start or at very least a few years ahead, creates the opportunity for a BADR claim.
Restriction of relief
BADR is restricted on a disposal if there are substantial investment assets held within the business. Again, there is an opportunity to look at restructuring the business in the years before a sale if there is a risk of this applying to your business.
Watch our YouTube series here.
About Haines Watts
Haines Watts is a top 30 advisory and accountancy firm. The firm has been advising UK business owners for over 90 years, with a focus with a focus on supporting both owners and the businesses they run.
More information on Haines Watts can be found at www.hwca.com
Find out more about Anand.
Disclaimer. The information provided on this web site is of a general nature. It is not a substitute for specific advice in your own circumstances.