Section 169Q elections when there's no more BADR

The heady days of a £10m lifetime Entrepreneurs’ Relief allowance are now a distant memory. This was reduced to £1m in March 2019 and a pointless name change to Business Asset Disposal Relief (BADR) was also enacted just to confuse everyone...

The issue

One consequence of this is that it is much more common to have transactions where the lifetime BADR allowance (up to which gains are taxed at 10%) is blown and then all gains over £1m are taxed at 20%.

One lesser known effect of this is that there is now significantly less opportunity to make something known as a section 169Q election. This election is relevant where ‘paper’ (such as shares and non-qualifying corporate bond (or non-QCB) loan notes) forms part of the consideration on a share disposal.

The default position is that there is no disposal for those assets which are exchanged for paper and the new paper simply takes on the acquisition history of the old assets. Generally, this default position is a good thing because tax is shunted forward into the future, but it is undesirable when the new assets will not qualify for BADR.

This is where the section 169Q election comes in.

Example 1

Ged sells his company for £500,000 cash and £500,000 non-QCB loan notes in the buyer. Given negligible acquisition costs, this leaves him with a £1m gain.

Although he could pay £50,000 tax on the cash element and wait until the loan notes are repaid before paying tax on the remaining £500,000, the problem is that the loan note repayments would not qualify for BADR.

Therefore, Ged makes a section 169Q election and pays £100,000 of tax on the total consideration with nothing further due when the loan notes are paid.

That is all fairly simple where BADR is concerned, however, in this time of political uncertainty sellers will often still want to pay tax upfront even at the higher 20% rate. Here, they are not concerned about the BADR status of the new assets but rather the prospect of a Labour Government increasing capital gains tax rates before they get the chance to realise the new paper assets.

It is not widely appreciated that a section 169Q election can only be effective to disapply the ‘rollover provisions’ if a claim for BADR is made in conjunction with the disposal. Therefore, sellers do not have carte blanche to lock in their gains when paper is received. Technically they will be forced into rolling the dice and accepting the consequences of any future rate hikes.

Leaving some BADR on the table

Some commentators have suggested that part of the BADR allowance can be left on the table so as to keep open the option of future section 169Q elections. Where cash gains exceed £1m then this would involve only claiming £999,000 of BADR. The idea would then be to keep the remaining £1,000 of allowance up your sleeve so that you have power to make an election in the future.

Opinions are divided over whether this is possible. There is a certain amount of ambiguity around whether qualifying gains have to ‘absorb’ all available BADR allowance. One view is that you simply choose how much of the qualifying gain to put in box 50 of the return and this seems reasonable.

Hamilton Rose's view

Historically, the name of the game has always been to defer tax to as late as possible. There has generally not been much appetite to ‘pay now’ unless it was a case of locking in BADR. We are now in highly uncertain times and the ‘pay now’ option will be attractive to protect against rate increases.

There are other ways apart from section 169Q elections to accelerate gains. For example, loan notes could instead be structured as simple deferred consideration which would trigger an upfront tax charge.

In rare cases, it may be possible to claim that the transaction is not being carried out for bona fide commercial reasons which would also prevent the reorganisation ‘rollover’ provisions from applying.

However, section 169Q remains a useful tool. It should be available for anyone with even £1 of lifetime allowance remaining and this is why it may always be worth trying to leave some on the table…