Following the Budget there will be a rise in the rate of Business Asset Disposal Relief (BADR) from 10% to 14% from 6 April 2025 and to 18% from 6 April 2026.
If you are undergoing a transaction or selling shares in your business, then you may want to consider finalising transactions prior to these dates to ‘lock in’ lower rates of tax. There are potentially significant tax savings to be had by doing so.
Locking in lower rates of CGT – unconditional sale contracts
Taxpayers tempted to “lock in” lower capital gain tax (CGT) rates by accelerating the date of a sale by entering unconditional sale contracts should be mindful of the changes introduced by anti-forestalling legislation.
Problems could arise where contracts are entered into for anything other than ‘bona fide’ commercial reasons. Anti-forestalling rules were introduced to counter-act the use of contracts as a form of tax planning and could mean that the higher rates of BADR are applied instead.
Typically, the tax point of a transaction for CGT is the date where contracts are exchanged. However, where a taxpayer transfers an asset on or after Budget Day pursuant to an unconditional contract exchanged prior to Budget Day, the taxpayer will only be able to apply the pre-Budget Day rates of CGT if the following two conditions are met:
- the contract was not entered into with the purpose of securing the old BADR rates; and
- where the parties to the contract are connected, the contract was entered into for wholly commercial reasons.
Otherwise, the taxpayer will be taxed as if the date of disposal was the date when the asset was transferred.
Additionally, for a taxpayer who has gains of more than £100,000 accruing in this way, the taxpayer must make a claim containing a statement that the above-mentioned conditions are met.
Any taxpayer who has made such a disposal and wishes the pre-Budget Day rates and rules to apply will need to consider whether they have sufficient evidence to demonstrate that the above conditions are met.
However, one can be more relaxed when a sale is made for entirely commercial reasons, and the timing of contracts is simply accelerated to beat the budget date or subsequent uplifts in BADR rate. Guidance suggests that the rule would not apply in those circumstances.
Unforeseen consequences of the anti-forestalling rules
It seems that the anti-forestalling rules introduce tighter deadlines by when to make a claim to benefit from more favourable tax rates, potentially affecting current, historic and future ‘share for share’ exchanges and ‘reorganisations’. It is not clear if this was the intended consequence of the rules.
What is a ‘share for share’ exchange?
A ‘share for share’ exchange typically occurs when shares in one company are exchanged for shares/loan notes in another. In can also take place when shareholders in the same or different companies agree to swap shares with each other.
‘Share for share’ exchanges do not immediately trigger Capital Gains Tax charges. Instead, the capital gain is effectively rolled over and comes into charge when the new shares are disposed of. The new shares inherit the base costs of the old.
This protects taxpayers from paying tax on a disposal where no cash is received with which to pay it.
When is it beneficial to disapply the rules?
There are some circumstances where these rules do not benefit the taxpayer. For example, it may be the case that the shares being sold are eligible for BADR, but the shares you are acquiring in exchange are not. In that instance, the ‘share for share’ exchange rules would mean that the opportunity to benefit from the lower rate of BADR in the future is lost. These circumstances can arise if you are selling your personal company in exchange for shares and/or loan notes or as part of a reorganisation.
To avoid this, taxpayers can make an election to disapply the ‘share for share’ exchange rules. By doing so, the taxpayer is immediately taxed on the difference between the purchase price of these shares and their market value but can claim the lower BADR rate. In turn, the base cost of the new shares is uplifted, meaning the capital gain is typically lower when the new shares are subsequently sold. This results in tax saving compared with the position if an election to disapply ‘share for share’ relief has not been made.
The trade-off is that the taxpayer pays CGT on a transaction for which they have not yet received any cash proceeds. However, the tax savings from utilising BADR can make this worthwhile.
Making the election to disapply
The deadline for making an election is the anniversary of the 31 January following the tax year in which the transaction was made. For instance, if you made a transaction on 6 April 2023, you would have up to the 31 January 2026 to make an election to disapply the ‘share for share’ transfer rules.
However, to ‘lock’ in the current lower rates of BADR, it may be now beneficial to consider making the election as early as possible. While it is typically the date where contracts are signed that determines which rate of relief applies, it seems the anti-forestalling legislation now impacts this. Going forward, if you wish to make an election to disapply the ‘share for share’ rules, it is the date the election is made that determines which rate of BADR is available, not the date contracts are finalised.
When to make the election to disapply
As a result, if a share reorganisation occurs before 5 April 2025, the taxpayer has until the 5 April 2025 to make an election to disapply the share for share transfer rules if they wish to benefit from the 10% BADR. This also applies to transactions occurring before the Budget announcement on 30 October 2024 where the taxpayer has yet not made an election.
Looking ahead, where share re-organisations occur after the 5 April 2025, elections would need to be made by 5 April 2026 to benefit from the 14% BADR before the increase to 18%.
Moving forward
This is unlikely to present a problem for those who have already used their BADR lifetime limit of £1m, or those realising cash proceeds that exceed that amount as part of a transaction. However, the changes should be a consideration in respect of company reorganisations or buyouts where proceeds are largely in shares or loan notes.
If you are planning a share re-organisation or have recently undergone one and would like advice on whether to make an election to disapply ‘share for share’ relief, please get in touch.
This article was correct at the time of publishing.
