The clue is in the title for Business Asset Disposal Relief. When Entrepreneurs’ Relief was rebranded in legislation introduced in 2020 as BAD Relief, it was pretty clear what some in the Treasury thought of it. As we approach Rachel Reeves’ first Budget as chancellor, these may be the last days for business owners to benefit from what has previously been badged as the ‘UK’s worst tax break’.
BAD Relief (BADR) allows for some taxpayers to benefit from a 10% capital gains tax (CGT) rate on the sale of certain business assets, up to a maximum of £1m of capital gains in their lifetime. It is commonly claimed by business owners on the sale of shares in their company, allowing them to potentially benefit from a £100,000 tax saving. It used to be substantially more generous prior to the changes made in 2020 when it could provide a tax saving of up to £1m.
The history of BADR is a messy one and may partly explain the ill-feeling some have towards it. Its origins lie in what might be charitably categorised as a change of heart from Alistair Darling in 2008. In his October 2007 Pre-Budget statement, Mr Darling had announced the introduction of a flat rate of CGT of 18%. This came alongside the scrapping of taper relief, a different CGT relief that also allowed some business owners to potentially benefit from a 10% tax rate.
In response to the criticism of the scrapping of taper relief, Mr Darling announced the introduction of Entrepreneurs’ Relief on 24 January 2008 in a statement to parliament. Despite surviving for a further 16 years, this hastily introduced relief has not really recovered from the initial criticisms levelled at it.
One critique which gets to the heart of the dissatisfaction some have with BADR, and Entrepreneurs’ Relief before it, came in 2019 when it was noted it has “minimal impact on encouraging entrepreneurship in the UK… The point of Entrepreneurs’ Relief is that it rewards you when you make a lot of money. There are lots of things getting in the way of people becoming great entrepreneurs in this country, but the fear of tax on future gains is not one of them.”
Those comments came from Sir Edward Troup, a former permanent secretary at HMRC and a key figure in the panel of experts put together by Labour to help advise on modernising the tax authority. In light of this, and the previous reports last year that Labour was considering scrapping or reducing BADR, the prospects of it surviving this parliamentary term in its current form are perhaps looking slim.
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By GlobalDataBased on HMRC’s latest estimates, BADR costs the exchequer in the region of £1.5bn annually, potentially placing it squarely in the sights of the chancellor as an expensive relief that Ms Reeves and the country may no longer be able to afford. An alternative approach may be to limit its availability further, perhaps halving the lifetime limit to £500,000 of capital gains, rather than the current £1m limit. That might only provide savings in the region of £500m however, so may not go far enough given the challenge to fill the £22bn ‘black hole’ identified.
The scrapping of BADR would likely have more of a disproportionate impact on owners of smaller businesses and members of management teams who have been incentivised with shares or share options. Not necessarily those CGT payers with the broadest shoulders. However, if given the choice between a substantial increase in the rate of CGT and the scrapping of BADR, many entrepreneurs may be prepared to sacrifice this relief instead.
