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How Business Asset Disposal Relief (BADR) applies to temporary non-residents

Posted on 17 May 2023

Where applicable, Business Asset Disposal Relief (BADR) results in a favourable 10% capital gains tax (CGT) rate being applied to qualifying capital gains (rather than up to 20%), on lifetime BADR gains of up to £1 million. It is usually relatively straightforward for an eligible taxpayer to claim BADR. A claim for BADR in respect of a qualifying business disposal must be made on or before the first anniversary of the 31 January following the tax year in which the qualifying business disposal is made.

But how would the BADR requirements apply to a temporarily non-resident individual who sold their qualifying shares whilst non-resident and then returned to the UK within five years? Technically, under the temporary non-residence rules, any capital gains made whilst they were non-resident, in relation to assets acquired prior to becoming non-resident, are taxed as if they were made in the year they return to the UK (subject to some exceptions).

For BADR however, the disposal is made when the taxpayer sells the asset. A gain made on that disposal is subject to CGT in the tax year in which they sold the asset, at a 10% CGT rate if BADR is available. This deeming provision would appear to make it impossible to claim BADR in time if the sale was made more than two years or so before the temporary non-resident's return to the UK.

Historic HMRC responses to questions on how Entrepreneur's Relief (ER, as BADR was then called) applied to non-residents suggests that taxpayers should have made protective elections within the statutory time limits to enable them to benefit from ER just in case. Current HMRC guidance in CG63970 suggests such a protective claim for BADR may be possible. For non-resident individuals who consider they may return to the UK, if a disposal of a business asset is contemplated whilst non-resident, the interaction of these two rules suggests there is merit in considering making a protective claim for BADR when the disposal is made – though there is no guarantee it will be effective.

The interaction of these rules is not clear. Every taxpayer will have to self-assess on a case-by-case basis with a reasonable grounding for their basis of any BADR claims made. To the extent a taxpayer has any concerns over disposing of assets whilst non-resident, they should seek tax advice in advance.

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