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Business Asset Disposal Relief (BADR) provides relief to individuals on gains subject to Capital Gains Tax (CGT). Ordinarily, a gain related to a disposal of residential property will be taxed at 18% for basic rate taxpayers and at 28% for higher rate taxpayers. Where BADR is available it will result in the gain being taxed at 10% rather than 18% or 28%.  There is a lifetime limit of £1M available for any one individual’s gains.

Spouses or civil partners are separate individuals and can both make a claim.  

There is a time limit to make a claim i.e. on or before the first anniversary of the 31 January following the tax year in which the qualifying business disposal is made.

It should be noted that to qualify for BADR assets should be held for a minimum 2-year period.  A disposal of assets used in a qualifying business must be made within 3 years of the business ceasing.

For the purposes of BADR business is defined as:

Trade, profession, or vocation conducted on a commercial basis with a view to a profit. [Sec. 169 s(1) TCGA 1992]

The most common of residential property ownership are:

1. Property Investment,- holding for long-term investments and generating rental income. 
2. Property Development- Property which is acquired with the intention of renovation with a view to realising a profit on the sale.
3. Property Trading- typically the acquisition of property will involve little or no renovation work before a subsequent disposal for a profit.

Property Development and Trading will involve profits and losses on disposals subject to income tax as the properties are stock acquired for a trade.  In these two areas, the only possibility for BADR will be assets used for the purposes of the trade e.g. trading premises.  The extension to this is a disposal of shares in a company carrying out property development and or trading.  In this case, it is likely the company will be deemed to be carrying on a trade.

In the case of property Investment, there will be very few cases that meet the criteria of Sec 169 s(1) above.  The property held as an investment and to produce rental income are most likely deemed to be excluded assets:

(a) shares and securities, and

(b) assets, other than shares or securities, which are held as investments.

[ Sec.169L(4) TCGA 1992]

So the summary so far is that BADR is not generally available for individuals owning residential property.  The notable exception to this is property let as Furnished Holiday Lettings [FHL]

FHL are as the name suggests are where the landlord provides furnishings for normal residential use and certain occupancy criteria are met:

• Available for lettings 210 days each year
• Actually let for 105 days each year
• Not let for 31 days or more to the same tenant

The availability of BADR for FHL is found at TCGA92/S241A(4), (5) & (11):

For the purposes of the BADR under Section 169H TCGA 1992, 

• any UK property business which consists of, or so far as it consists of, commercial letting of furnished holiday accommodation shall be treated as a trade.
• any overseas property business which consists of, or so far as it consists of, the commercial letting of furnished holiday accommodation in one or more EEA states shall be treated as a trade.
• all such furnished holiday lettings undertaken by a particular person or partnership are treated as a single trade.

The last bullet point above can be an area of contention i.e. where there is one single FHL and it is disposed of, then clearly the entire trade is being disposed of and subject to ownership criteria, qualifying for BADR.

Where there is more than one FHL held and one of the holdings is disposed of, HMRC can take the position that the whole business is not been being disposed of and therefore BADR is not available on the single disposal.  As is always the case the specific circumstances are key and prior to a single disposal of a FHL from a portfolio advice should be sought.

Whilst property investment generally does not enjoy BADR there will occasionally be opportunities whereby use of property changes e.g an unfurnished property is converted to a FHL.  In these cases and subject to the other qualifying criteria there is potential to secure BADR.

As a potentially complex area readers are advised to take specific advice prior to any disposal. If you have any further queries on this subject please reach out to us at 01902 711370 or email enquiries@uklandlordtax.co.uk.

Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG