Business Asset Disposal and Investors’ relief 

One of the backing documents to Rachael Reeves autumn budget confirmed that the Investors’ relief lifetime allowance is to be reduced from £10 million to £1 million.

Investors relief has been around for many years, allowing those who qualify to benefit from a lower rate of capital gains tax. Initially, the lifetime allowance was set at £10 million, aligned with the separate allowance of £10 million that was available for what used to be called Entrepreneurs’ Relief.

The March 2020 Budget saw the lifetime limit for Entrepreneurs’ Relief (ER) immediately reduced from £10 million to £1 million and it has stayed at that level ever since, although the relief is now referred to as “Business Asset Disposal Relief” (BADR). BADR is available to individuals disposing of a business or shares in their personal trading company.

While this was a disappointing change, the reduction to the lifetime limit did not apply to Investors’ Relief (IR) where a separate £10 million lifetime remained – until 30 October 2024. From the budget date, IR was also reduced to £1 million to align with BADR.

How does IR differ from BADR?

The criteria for eligibility for BADR and IR share many similarities but IR is aimed at incentivising external investment. This means it is not usually available to employees and directors, however it may be available to directors who are not remunerated.

In terms of the shares themselves, they must be ordinary shares issued in exchange for cash on or after 17 March 2016. There is a minimum holding period of three years before the relief becomes available, unlike the two years required for BADR.

During the period of ownership, the subscriber should not be an employee or an officer of the company, subject to two exceptions:

• After a period of at least 180 days from subscription, the individual becomes an employee of the company where there was no reasonable prospect of them becoming an employee at the point of subscription.
• The individual takes up the role of an unremunerated (ignoring dividends) director after subscription and they previously had no connection to the company.

Although IR may not be as generous as the more renowned Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) schemes, the relief does extend to industries and trades specifically prohibited for EIS such as farming, hotels and property development.

Further budget changes to BADR and IR

Rachael Reeves announced further changes to both BADR and IR following the decision to increase capital gains tax rates from budget day. The changes see the rate of tax on BADR or IR qualifying disposals remain at 10% to 5 April 2025, increase to 14% for the 2025/26 tax year, and to 18% thereafter which aligns with the CGT rate for basic rate taxpayers. However, when compared to the main rate of Capital Gains tax of 24%, the per person saving on £1 million of allowance will be worth £140,000 until the end of this tax year, reducing to £60,000 from 6 April 2026.

The legislation surrounding IR and BADR is particularly complex and investors should take professional advice to ensure they do not fall foul of the qualifying criteria.

For more information on the issues raised in this article or for advice on your individual circumstances please get in touch with your usual Crowe contact.