BADR: increasingly limited value on exit

Business Asset Disposal Relief (BADR) has traditionally provided entrepreneurs with a valuable tax break when selling their business.

However, with the effective limit on the relief reduced, the maximum tax saving is now only up to £30,000, requiring a qualifying gain of £500,000 to obtain the full benefit.

For an entrepreneur who has spent years building a successful business, that saving is relatively modest in the context of a sizeable exit. BADR was already becoming less significant in overall exit planning, and its reduced value means that it may now make only a relatively small difference to the final tax bill.

Founders’ Relief: a significant opportunity for the right businesses

It is not all bad news for some successful entrepreneurs.

The introduction of a new Founders’ Relief could potentially produce capital gains tax (CGT) savings of up to £1.4 million. That is a very significant incentive, although the conditions, which are currently out for consultation, are deliberately strict.

The relief is targeted at highly committed initial founders who establish innovative businesses that subsequently achieve substantial growth. It will therefore not be available to every shareholder or entrepreneur, and understanding the qualifying conditions from an early stage could be crucial.

For founders with genuine growth ambitions, this potentially makes the tax position at the eventual exit an important consideration from the very beginning of the business journey.

More help for smaller entrepreneurs

There is also welcome support at the other end of the entrepreneurial spectrum.

Increasing the trading allowance to £3,000 should benefit people testing an idea, operating a small side business or generating relatively modest amounts of self-employed income.

Entrepreneurs’ living costs assistance could be even more important. One of the biggest barriers to starting a business is simply having sufficient personal financial resources to pursue an idea before it begins generating income.

Providing greater support with those costs could make entrepreneurship more accessible to people who do not have personal savings or financial backing. 

Taken together, the changes create an interesting contrast: less generous tax treatment for some established business owners on exit, but potentially substantial relief for qualifying founders and additional support for people taking their first steps into business.