HMRC is contacting taxpayers who it believes have exceeded their Business Asset Disposal Relief (BADR) lifetime allowance.

The tax body is sending ‘nudge’ letters to people who, its records show, have gone over the BADR lifetime limit of £1 million before submitting their 2020-2021 tax return.

If you’re one of the affected taxpayers, you should check your self-assessment tax return and make any necessary changes.

If you’ve already exceeded the limit, your BADR claim is unlikely to be accepted and you’ll need to pay tax on the capital gain at the normal rate. But if you don’t believe you’ve gone over the limit and you think your current claim is correct, you should get in touch with HMRC.

If you do owe tax, HMRC will charge interest on any tax you pay late.

What is BADR?

Business Asset Disposal Relief is a type of tax relief that reduces the amount of capital gains tax (CGT) you pay after disposing of all or part of your business. It was previously known as Entrepreneurs’ Relief (ER) before it was updated by the Finance Act in 2020.

BADR claims can only be made up to a lifetime limit, which used to be £10 million but is now £1 million. The new limit applies to qualifying disposals made on or after 11 March 2020.

BADR can significantly reduce the amount of CGT due. The relief means you’ll pay tax at 10% on all gains on qualifying assets.

Are you eligible for Business Asset Disposal Relief?

You can apply for BADR if:

  • You’re selling all or part of your business
  • You’re selling shares or securities
  • You’re selling assets you lent to the business

But as with any tax relief, there are certain conditions you must meet before you can be deemed eligible. You should carefully check the criteria before applying or seek help from a tax professional.

And if you’re a trustee selling assets held in a trust, you may also qualify for BADR.

How does it work?

For example, if you dispose of a qualifying personal company on or after 11 March 2020 with gains of £2 million, you’ll be eligible for BADR on the first £1 million. But you’ll only qualify if you haven’t claimed the relief before and you meet the other conditions.

The first £1 million will be subject to the BADR rate of CGT of 10%, while the remaining chargeable gains will be liable to CGT at 20% (subject to the application of your annual exempt amount).

Our thoughts

BADR is a valuable relief that has changed over the years from when it was known as Entrepreneurs’ Relief. At one point the lifetime limit was as high as £10 million, but it’s now dropped to £1 million, which is much lower.

It may be tempting for taxpayers to ‘claim it anyway’ on their tax returns and hope HMRC doesn’t realise they’ve exceeded their lifetime allowance with previous disposals. But this is a dangerous tactic, which the tax body is likely to pick up.

Or perhaps you’re genuinely confused by the multitude of changes over the years?

Either way, it’s important for you to consider your overall position if you receive a ‘nudge’ letter. If you’ve claimed too much BADR, you should tell HMRC.

The penalties and implications can be far more serious if you ignore the letter (or, worse, lie in your response to it) and HMRC finds out you’ve underpaid.

Plain-English UK tax advice

Our team of experienced tax advisers will help you make sense of the complex and ever-changing world of tax. Call us today on 07813 434195 or email: stephanie.churchill@churchilltaxation.co.uk

Steph Churchill

Stephanie Churchill

Managing director & co-owner of Churchill Taxation