Business Asset Disposal Relief: HMRC Targeting Tax Payers who have Exceeded the £1m Lifetime Allowance

Navigating the UK tax system can be difficult, especially for high earning business owners with complex affairs and busy schedules . One key area of interest for many business owners is Business Asset Disposal Relief (BADR). Recently, in June 2024, HMRC has intensified its scrutiny on taxpayers who have exceeded the £1 million lifetime allowance for BADR.

This article will delve into what BADR is, how the lifetime allowance works, and what action HMRC is currently taking. We’ll also explore the implications for those affected and provide guidance on how to manage your tax planning effectively.

What is Business Asset Disposal Relief?

Business Asset Disposal Relief, formerly known as Entrepreneurs’ Relief, is a valuable tax relief that allows business owners to reduce the amount of Capital Gains Tax (CGT) payable when they dispose of qualifying business assets. This can include selling, swapping, or giving away assets.

BADR reduces the CGT rate from 20% to 10% on qualifying gains, making it particularly beneficial for higher-rate taxpayers. BADR is applicable under several conditions:

• The business owner must have owned the business for at least two years before the disposal.
  
  
• The business must be a trading company or the holding company of a trading group.
  
  
• The claimant must be an employee or officeholder of the company.

What is the Lifetime Allowance?

The lifetime allowance for BADR is the maximum amount of qualifying gains on which you can claim the relief. As of 11 March 2020, this limit was reduced from £10 million to £1 million. This means that once you have claimed BADR on £1 million of gains, no further BADR can be claimed on additional gains.

The reduction in the lifetime allowance was significant and impacted many business owners who were accustomed to the higher limit. It is crucial for business owners to be aware of this change to avoid unintentional non-compliance with HMRC regulations. If you’re considering relocating your business, our article on Moving Your Business to Dubai: UK Tax Planning and Important Considerations can provide valuable insights.

Worked Example:

A business owner sells their company and makes a capital gain of £500,000. Under normal circumstances, this gain would be taxed at the standard Capital Gains Tax rate i.e. 20%. However, by claiming BADR, the tax rate is halved to 10%, significantly reducing the tax liability. This means the business owner would pay £50,000 in CGT instead of £100,000, thus saving £50,000.

If a business owner disposes of multiple assets over time, they can continue to claim BADR until the cumulative gains reach the £1 million lifetime limit. For instance, if they initially claim BADR on a £300,000 gain, they would still have £700,000 of gains eligible for the reduced tax rate.

What Action is HMRC Taking?

HMRC has started targeting taxpayers who have exceeded the £1 million lifetime allowance but continue to claim BADR. They have identified individuals through their 2022-23 tax returns and sent letters to those who have claimed more than the allowable limit. These letters inform taxpayers that their claims are unlikely to be accepted and that they will need to pay tax on the capital gain at the normal CGT rates.

HMRC’s approach includes:

• Reviewing self-assessment tax returns for claims exceeding the £1 million limit.
  
  
• Issuing letters to taxpayers who have potentially overclaimed BADR.
  
  
• Advising taxpayers to amend their tax returns and pay any additional tax due.

For more on compliance checks, you might find our article on Airbnb Income: HMRC Compliance Check Letter informative.

Who is Affected?

The individuals most affected by HMRC’s actions are those who:

• Have already claimed BADR on gains exceeding the £1 million limit.
  
  
• Were unaware of the reduction in the lifetime allowance and continued to claim relief on disposals made after 11 March 2020.
  
  
• Have received a letter from HMRC regarding their excess claims. Taxpayers who received letters from HMRC are advised to take immediate action to rectify their tax returns. Ignoring these letters can lead to further penalties and interest charges.

What to Do if You’ve Gone Over the Lifetime Allowance?

If you have exceeded the BADR lifetime allowance, it is crucial to act promptly. HMRC advises affected taxpayers to amend their self-assessment tax returns within 30 days of receiving the notification letter. Failing to do so may result in penalties and interest charges. Here are the steps you should take:

1. Review your tax return: Ensure all your gains and BADR claims are accurately reported.
   
   
2. Amend your tax return: If you find that you have overclaimed BADR, amend your self-assessment tax return to correct the error.
   
   
3. Pay additional tax: Calculate and pay any additional tax due as a result of the correction.

For more guidance on handling capital gains tax, refer to our guide on Capital Gains Tax on an Investment Property Sale.

Tax Planning Options:

Proactive tax planning is essential to avoid falling foul of the rules. Here are some strategies to consider:

• Use Other Reliefs: Consider other tax reliefs such as the Enterprise Investment Scheme (EIS), Business Relief or Gift Relief for additional tax benefits.
  
  
• Consider Spouse Transfers: Transferring assets to a spouse can help utilise both partners’ lifetime allowances.
  
  
• Plan Disposals: Strategically plan the timing of your asset disposals to optimise tax reliefs.
  
  
• Consult a Tax Adviser: Professional advice can help you navigate the complexities of tax reliefs and ensure compliance with HMRC regulations.

Need Help?

Navigating the intricacies of Business Asset Disposal Relief and staying compliant with HMRC can be challenging. As a professional accountancy firm, we are here to help. Our team of experts can provide you with the guidance and support you need to manage your tax affairs effectively. We offer a range of services, from tax planning to compliance checks, ensuring that you make the most of available reliefs while staying within the law.

Our expertise extends to various sectors, including property, healthcare, and technology, allowing us to offer specialised advice tailored to your industry. For further assistance, feel free to contact us through our Contact page or explore our range of Services tailored to meet your business needs.