As noted in our initial comments on the Autumn Budget 2024 (here), and our more detailed overview (here), the rates of capital gains tax increased on Budget Day (30 October 2024) to the rates previously set for only gains realised on disposals of residential property. Overall, this was better than we had been expecting. However, other changes were to capital gains Business Asset Disposal Relief and Investors’ Relief.
Planning now can help make the most of the remaining benefits before this window closes.
Business Asset Disposal Relief (BADR)
Whilst BADR will continue (which we had expected – albeit my thinking was that it was worth so little now compared to previously, that it was hardly worth playing around with, which I was wrong about – however, I still think my logic is correct), it will be significantly curtailed (again) from 6 April 2025.
Currently, BADR provides a 10% capital gains tax rate for qualifying gains up to a lifetime limit of £1m – so worth a maximum of £140,000 in capital gains tax per individual.
The lifetime limit was £10m at its height – worth a maximum saving of £1m in capital gains tax per individual. This was cut when the lifetime allowance was reduced to £1m in 2020 – reducing the maximum saving per individual to £100,000.
Under the proposals outlined in the Budget, the capital gains tax rate applying to gains qualifying for BADR will rise to:
- 14% on 6 April 2025 – reducing the maximum saving per individual back to £100,000; and
- 18% on 6 April 2026 – further reducing the maximum saving per individual to £60,000.
From 6 April 2026, this vastly reduced maximum saving will not likely be an incentivisation for planning around the relief – whereas previously, when the maximum saving was higher, the relief was a driver for a lot of planning and structuring.
Given the changes, those with unused lifetime limits (remembering to consider whether any claims were made for BADR’s predecessor, Entrepreneurs’ Relief – as the lifetime limit applies to claims made for both reliefs (essentially the same relief but the name was changed)) should consider using the relief before 6 April 2025, and certainly before 6 April 2026.
This will be particularly relevant to those considering liquidating a currently trading company or company that has recently ceased trading (within the last 3 years), and furnished holiday let property owners (given the abolition of the furnished holiday let regime).
Even with the reduced value, I still think that BADR will be relevant to the conversations around benefits of share incentivisation schemes – particularly the Enterprise Management Incentive (EMI) scheme
Investors’ Relief
It was never a widely recognised fact that another relief, Investors’ Relief, also gave rise to a 10% capital gains tax rate on qualifying gains, and this relief retained a separate lifetime limit of £10m – the current maximum capital gains tax saving being £1.4m.
Investors’ Relief was little used and focused on, however, we prepared a lot of structuring advice for relevant clients to obtain the relief in the future that had previously used their BADR lifetime limit and were getting involved in another venture.
Investors’ Relief and BADR are different, the conditions for qualification for BADR being stricter – particularly around what, if any cash, the “investor” could extract from the relevant company.
With a maximum saving of £1m before Budget Day, complying with these strict conditions was worth it for many clients aiming to benefit from the relief.
However, it was announced in the Budget that from Budget Day (30 October 2024) the lifetime limit for gains qualifying for the relief has been reduced to £1m (from £10m), and the same rate changes applying to BADR will apply to Investors’ Relief, so that the 10% rate will rise to:
- 14% on 6 April 2025 – reducing the maximum saving per individual back to £100,000; and
- 18% on 6 April 2026 – further reducing the maximum saving per individual to £60,000.
Given the relief only applies to a relatively niche set of circumstances, and given the significantly reduced tax saving benefit, I cannot see that anybody will now be actively trying to structure commercial investments and restrict the cash they can extract for relevant companies to obtain the relief.
Where investors currently qualify for the relief and are considering an exit in any event, they may wish to consider bring a disposal event forward, where possible.