No trading company – No problem?

Many company owners hope to claim business asset disposal relief (BADR) (formerly known as entrepreneurs’ relief) on an eventual sale of their shares, to benefit from the special capital gains tax rate of only 10%.

The small print

In most cases, the BADR provisions on a share disposal require that certain conditions are satisfied for at least two years ending with the date of disposal; firstly, the company is the individual’s personal company (see below) and is a trading company (or the holding company of a trading group); and secondly, the individual is an officer or employee of the company (or a trading group member) (TCGA 1992, s 169I(6)).

The ‘personal company’ requirement is broadly that the individual holds at least 5% of the company’s ordinary share capital; that holding gives at least 5% of voting rights in the company; and it also gives beneficial entitlement to at least 5% of distributable profits and at least 5% of distributable assets on a winding up, and/or beneficial entitlement to at least 5% of the proceeds in the event of a disposal of the company’s entire ordinary share capital (TCGA 1992, s 169S(3)).

Is it a ‘trading company’?

A ‘trading company’ for BADR purposes is defined as a company carrying on trading activities whose activities do not include non-trading activities to a substantial extent.

‘Substantial’ is widely accepted to mean more than 20% of certain measures, which can include income from non-trading activities, the asset base of the company and/or expenses incurred or time spent by officers and employees of the company in undertaking its activities (see HMRC’s Capital Gains manual at CG64090).

Many companies own non-trading assets. This can cause uncertainty about trading status. For example, rental income from investment properties may be less than 20% of the company’s combined trading and letting receipts, but the value of those properties may be ‘substantial’ in comparison with its total assets.

What if the company is no longer a ‘trading company’?

A possible let-out

Happily, there is a relaxation in the trading company requirement for BADR purposes in certain circumstances.

Those circumstances are broadly that the general BADR conditions mentioned above (i.e. about the company being the individual’s ‘personal company’, the company’s trading status, and the individual’s officer/employee status) are met throughout a two-year period ending with the date on which the company’s trading status (or trading group member status) is lost, where that date is within three years ending with the share disposal (TCGA 1992, s 169I(7)).

Looking back

Some taxpayers and advisers seem to assume that the above ‘let-out’ from trading company status only applies at the end of the company’s useful life where it has ceased trading and is being wound up. This is not the case; it is possible that the company is not a ‘trading company’ only temporarily. HMRC confirms (at CG63975): ‘This does not necessarily mean that the trade ceases but rather that the company no longer meets the definition.’

This let-out may also be useful (for example) where the shareholder ceased to be an officer or employee before disposing of their shares, in some cases.

The above article was first published in Business Tax Insider in September 2019 (

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