Business Asset Disposal Relief on Residential Property Disposals

When you sell an asset that has appreciated in value, you must pay tax on the capital gains, known as Capital Gains Tax (CGT). CGT applies to most assets, with certain exemptions. Prior to 30 October 2024, the rate of CGT varied depending on the type of asset being sold. The tax rate on residential properties ranged from 18% to 24% on disposal between April 2024 to 30 October 2024, whereas the rates for other properties and assets ranged from 10% to 20%, based on the seller’s tax position. From that date onward, the rates for all the assets are standardised: 18% for gains up to the seller’s basic rate band and 24% on any gains above this.

To encourage business activity and economic stability, HM Revenue and Customs (HMRC) offers Business Asset Disposal Relief (BADR) on the sale of businesses. Under BADR, the total gain (up to a specific threshold) is taxed at a reduced rate of 10%. But does this relief extend to residential properties? We’ll explore this question in this article.

What is a Business Asset Disposal Relief (BADR)?

Introduced as Entrepreneur’s Relief in 2008, BADR was renamed in the Finance Act 2020, effective from 6 April 2020. This relief reduces the CGT rate on qualifying business asset disposals to 10%, up to a lifetime limit of £1 million.

Introduced as Entrepreneur’s Relief in 2008, BADR was renamed in the Finance Act 2020, effective from 6 April 2020. This relief reduces the CGT rate on qualifying business asset disposals to 10%, up to a lifetime limit of £1 million. Any gains qualifying for BADR but above the £1 million threshold will be taxed on the standard rates.

Eligibility Criteria

For a claim to BADR to be valid, the following conditions must be met:

• The seller must be an individual.
• The disposal must relate to business assets.

Under Section 169 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992), a "disposal of business assets" includes:

• Disposal of a whole or identifiable part of a business.
• Disposal of assets used in a business that has ceased.
• Disposal of shares in a company.

Where only business assets (and not the whole or part of the business) are disposed of, BADR is available only if the business has ceased and the disposal occurs within three years of cessation.

Additionally, the business must have been owned for at least two years immediately before cessation. This holds irrespective of whether the taxpayer sells business assets or the business itself.

To qualify, a business must constitute a trade, profession, or vocation conducted commercially with a view to profit.

Making a Claim

If you have received a notice to file a return, the claim should be made in your personal tax return. Claims for relief must be submitted on or before the first anniversary of 31 January following the tax year in which the qualifying business disposal occurs. If the disposal occurred in 2023/24, the relief must be claimed on or before 31 January 2026.

A claim for Business Asset Disposal Relief is not irrevocable. It can be amended or revoked within the time limit. Additionally, provisions for self-assessment and standalone claims may extend the time limit for amendments, particularly if an enquiry is opened.

BADR on the Disposal of Residential Property

HMRC does not recognise property letting businesses as trades or businesses; Instead, they are considered investment activities. This means that residential property disposals do not meet the primary criteria of being a business disposal. Therefore, the disposal of a residential property will be subject to standard CGT rates of 18% and 24%.

However, if the residential property being sold is an FHL property, the disposal may be eligible for BADR as HMRC recognises FHLs as a form of ‘trading business’.

BADR on the Disposal of a Furnished Holiday Let (FHL)

Despite most of the FHLs being residential properties, furnished holiday lets (FHLs) enjoy unique tax treatment, including being recognised as a trading business for BADR purposes. This special status allows FHLs to enjoy various tax benefits, including BADR if the business meets the qualifying holiday accommodation (QHA) conditions for at least two years before disposal.

However, following the government's announcement in the Spring Budget that FHLs will lose their special tax treatment from April 2025, now may be an ideal time for investors considering selling their FHL businesses. Detailed tax planning is essential, as the changes mean that from April 2025 onwards, FHLs will no longer be treated as trading businesses. Instead, they will be classified as standard property letting businesses, making them ineligible for BADR.

By acting before the rule changes take effect, FHL owners can take advantage of current reliefs, such as BADR, and potentially significantly reduce their tax liabilities.

Does BADR Apply if a Company Sells an FHL?

As previously mentioned, BADR is only applicable where the seller is an individual. Where a company that owns an FHL sells it, the relief does not exist. The gain from the disposal will form a part of the company’s taxable total profits and be taxed at the corporation tax rates.

However, if a company sells the shares in another company that lets out FHLs, the disposal of the shares may be exempt under the substantial shareholding exemption (SSE).

Under SSE, the gain from the disposal of shares is exempt if:

• The investing company has owned at least 10% of the shares for 12 months not beginning not more than six years before the day on which disposal takes place.
• The company being sold is a trading company.

Conclusion

Business Asset Disposal Relief (BADR) offers significant tax benefits, but its application to property disposals is limited. While standard residential properties are treated as investment activities and do not qualify, furnished holiday lets (FHLs) can benefit if they meet the qualifying holiday accommodation (QHA) conditions. However, with FHLs losing their special tax status from April 2025, owners should act promptly to take advantage of current reliefs before the changes take effect.

For corporate disposals, the Substantial Shareholding Exemption (SSE) provides an alternative for tax savings when selling shares in trading companies, including those managing FHLs. Proper tax planning and professional advice are crucial to navigating these opportunities effectively and minimising tax liabilities.