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HMRC warn of BAD relief claims

Newsletter issue – June 2023

Entrepreneurs‘ Relief (ER) was renamed Business Asset Disposal (BAD) relief on 11 March 2020, and at the same time the value of gains which can be covered by this relief was reduced from £10m to £1m on 11 March 2020. Where gains qualify for either ER or BAD relief the capital gains tax (CGT) is payed at 10% instead of at the full rate of 20%

This cap of £1 million of gains is a lifetime cap for the taxpayer not an annual cap. What‘s more the BAD relief is merely a rebranding of Entrepreneurs‘ Relief and any claims made under ER reduce the available cap for BAD relief.

If you had already made ER claims covering £1 million or more of gains by 10 March 2020, you can‘t make any further BAD relief claims, but older ER claims are not disturbed. However, if you hadn‘t exceeded £1 million of gains with ER claims, and you make a new BAD relief claim which takes the total of gains covered by either ER or BAD relief to over £1 million, the excess gains over £1m are not eligible for BAD relief.

This change in name for the relief coupled with the new rules of the lifetime cap has confused many people, leading to some incorrect BAD relief claims submitted on tax returns for 2020/21 and 2021/22.

HMRC has been writing to taxpayers who may have made incorrect claims for Business Asset Disposal (BAD) relief because their lifetime cap has apparently been exceeded.

Letter 1 is sent to taxpayers who had already exceeded the £1 million lifetime cap before their 2021/22 tax return was submitted. HMRC asks the taxpayer to amend their 2021/22 tax return to remove the BAD relief claim so the gains are taxed at the normal rate, which will normally be 20%.

Letter 2 is sent to taxpayers whose 2021/22 BAD relief claim takes them over the £1m cap. In such cases HMRC asks the taxpayer to amend their BAD relief claim to reduce the amount of gains included.

In both situations the taxpayer will need to pay additional CGT plus interest. HMRC is also likely to charge a penalty for an inaccurate tax return on the basis that the correction is a prompted disclosure. This penalty will range from 15% to 30% of the underpaid tax for a careless mistake, or 35% to 70% for a deliberate error.