COURSE: ACCA – TAXATION (TX)

Lecture Topic: Capital Gains Tax – Business Asset Disposal Relief

1. Conditions

 Business Asset Disposal Relief can be claimed where there is a material disposal of business assets.

A material disposal of business assets is:

(i) A disposal of the whole or part of a business which has been owned by the individual throughout the period
of two years before the date of disposal.

Business Asset Disposal Relief is only available in respect of capital gains arising from the disposal of assets
used for the purpose of the business and will therefore exclude capital gains arising from investments.

(ii) A disposal of one or more business assets in use in the business at the time at which the business ceases to
be carried on provided that:

- the business was owned by the individual for at least two years before cessation; and

- the disposal occurs less than three years after the cessation date.

(iii) The disposal of shares in a trading company where the individual has at least a 5% shareholding in the
company and is also an employee of the company and has owned the shares for at least two years before the
disposal.

2. How Business Asset Disposal Relief works

 Gains qualifying for business asset disposal relief are taxed at 10% whether they fall within the basic band or
above the basic band.

 Losses on assets qualifying for business asset disposal relief should first be set against gains on assets qualifying
for business asset disposal relief.

 Losses on assets not qualifying for business asset disposal relief should first be set against gains which do not
qualify for business asset disposal relief

 The annual exemption should first be set against gains which do not qualify for business asset disposal relief.

This approach could save tax at 20% (or 18% or 28% if residential property gains are involved) rather than at 10%.

 Although ‘capital gains that qualify for BADR’ are always taxed at a rate of 10%, they must be taken into account
when establishing which rate applies to other capital gains.

The approach is to apply ‘taxable income’ first to the basic band, followed by ‘gains qualifying for BADR, and
finally ‘gains not qualifying for BADR’.

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3. Lifetime Limit

 There is a limit of £1 million of gains on which business asset disposal relief can be claimed. This is a lifetime
amount starting from 6 April 2008.

Gains in excess of the £1 million limit do not qualify for business asset disposal relief.

4. Investors’ Relief

 In addition to normal business asset disposal relief, investors’ relief is also available to external investors in
trading companies which are not listed on a stock exchange. The investors’ relief has its own separate £10 million
lifetime limit, with qualifying gains being taxed at the rate of 10%. To qualify for investors’ relief:

(a) Shares must be newly issued ordinary shares in an unlisted trading company acquired by subscription after 17
March 2016.

(b) Shares must be owned for at least three years after 6 April 2016.

(c) The investor must not be an employee or remunerated director of the company whilst owning the shares.

Questions

1.
On 15 October 2022, the four shareholders of Alphabet Ltd, an unquoted trading company, all sold their shares in the
company. Alphabet Ltd has a share capital of 100,000 £1 ordinary shares.

Aloi had been the managing director of Alphabet Ltd since the company’s incorporation on 1 January 2012. She had held
60,000 shares since 1 January 2012.

Bon had been the sales director of Alphabet Ltd since 1 February 2021, having not previously been an employee of the
company. She had held 25,000 shares since 1 February 2021.

Cherry had never been an employee or a director of Alphabet Ltd. She had held 12,000 shares since 27 July 2015.

Dee had been an employee of Alphabet Ltd since 1 May 2013. She had held 3,000 shares since 20 June 2014.

Which of the above gains will qualify for business asset disposal relief?

2.
On 25 January 2023, Andy sold a 30% shareholding in Ultra Ltd., an unquoted trading company. The chargeable gain
arising on the disposal is £47,300. Andy had owned the shares since 1 March 2013 and was an employee of the company
from that date until the date of disposal.

Andy has taxable income of £60,000.

Calculate Andy’s capital gains tax liability for 2022-23.

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3.
Candy sells her shareholding which qualifies for business asset disposal relief, in January 2023, realizing a chargeable gain
of £15,000. Candy also made a chargeable gain of £28,300 in February 2023 on an asset which did not qualify for business
asset disposal relief.

Candy has taxable income of £42,000 in 2022-23.

Calculate Candy’s capital gains tax liability for 2022-23.

4.
Mandy sells an asset which qualifies for business asset disposal relief, in October 2022, realizing a chargeable gain of
£16,000. Mandy also made a chargeable gain of £31,300 in December 2022 on an asset which did not qualify for business
asset disposal relief.

Mandy has taxable income of £28,700 in 2022-23.

Calculate Mandy’s capital gains tax liability for 2022-23.

5.
On 30 September 2022, Sandy sold a business that she had run as a sole trader since 1 January 2015. The sale resulted in
the following chargeable gains:
£
Goodwill 260,000
Freehold office building 370,000
Freehold warehouse 170,000
800,000

The assets were all owned for more than two years prior to the date of disposal. The warehouse had never been used by
Sandy for business purposes.

Sandy has taxable income of £4,000 for the tax year 2022-23. She also made a capital loss of £28,000 in 2022-23 on an
asset not qualifying for business asset disposal relief.

Calculate Sandy’s capital gains tax liability for 2022-23.

6.
In March 2023, Randy sold a 45% shareholding in Splash Ltd., an unquoted trading company, realizing a chargeable gain
of £1,300,000. Randy had been an employee of Splash Ltd. for several years and had purchased the shares in 2018.

Randy has taxable income of £25,000 in 2022-23.

Calculate Randy’s capital gains tax liability for 2022-23.