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Trap containing money

Retrospective BAD relief traps taxpayers


HMRC is urging taxpayers to correct their 2020/21 tax returns if they accidentally claimed excessive business asset disposal (BAD) relief, following the retrospective reduction in their lifetime limit.

27th May 2022
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Business Asset Disposal (BAD) relief was formerly called Entrepreneurs’ Relief (ER), which was introduced in 2008 with a £1m cap on the amount of capital gains that can be covered by the relief per taxpayer. This is known as the lifetime cap, and it had been steadily increased over the years as shown in the table, until 11 March 2020.

Period for which ER claimed: Lifetime limit 
6 April 2008 to 5 April 2010 £1m
6 April 2010 to 22 June 2010  £2m
23 June 2010 to 5 April 2011 £5m
6 April 2011 to 10 March 2020 £10m
From 11 March 2020 (BAD relief) £1m

New name, new limit

In Rishi Sunak’s first Budget on 11 March 2020 he cut the ER lifetime limit to £1m, and bizarrely changed the name of relief to Business Asset Disposal Relief with effect from 6 April 2020. However, the name change had no effect on the rules or structure of the relief, so the amount a taxpayer had already used of their lifetime limit in ER claims was carried forward to be deducted from the available lifetime limit for BAD relief claims.  

Many tax advisers, and certainly most taxpayers, may not have realised that the new restriction on the level of available BAD relief had a retrospective effect. 

Where a taxpayer had already claimed ER on gains of £1m or more by 11 March 2020, no further BAD relief can be claimed. However, the earlier claims won’t be disturbed if they fell within the previous lifetime limits.

Nudging the taxpayer 

HMRC is now checking tax returns for 2020/21 and is writing to taxpayers who have apparently exceeded their lifetime limit for BAD relief, with one of two standard nudge letters.

In letter 1 HMRC says: “Our records show that you have exceeded the lifetime limit of £1m prior to submitting your self assessment return. This means your claim is unlikely to be accepted and you will need to pay tax on the capital gain at the normal rate of Capital Gains Tax.”

This implies that HMRC has checked the taxpayer’s records from 2008 to 2020, to tot-up any ER claims made in that 12-year period. It is quite possible that this calculation is not correct.

Meanwhile in letter 2 HMRC says: “You included a Business Asset Disposal Relief (BADR) claim in your 2020/21 self assessment return… Our records show this claim for BADR has
taken you over the lifetime limit of £1m.”

This may be an easier figure to quantify if the 2020/21 BAD relief claim covers gains in excess of £1m.

Making good 

On receipt of either nudge letter the taxpayer should amend their claim to BAD relief in their 2020/21 tax return, or respond to correct HMRC’s figures. HMRC will give the taxpayer a deadline by which to do this, which is normally 30 days. 

Interest will be charged on any additional tax due because of the amendment to the tax return, but the nudge letters imply that no penalties will be charged. 

BAD omens

If the taxpayer (or their tax agent) does not react to the nudge letter promptly, HMRC will open a tax enquiry (aka compliance check). This is likely to result in penalties being imposed for inaccuracies in the tax return. 

The compliance check factsheet CC/FS7a sets out the level of penalties that can be imposed for such a mistake, which in this circumstance will range from 15% to 100% of the underpaid tax. As HMRC has pointed out to the taxpayer that an error has been made in the return, the correction of the return by the taxpayer is treated as a prompted disclosure.    

Where HMRC has made a mistake, and the taxpayer’s BAD relief claim is within their lifetime limit, this also needs to be pointed out to HMRC without delay.

Replies (4)

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By Hugo Fair
27th May 2022 10:37

A timely reminder (especially for those, or their clients, receiving one of the nudge letters) ... but "retrospective reduction in their lifetime limit" is wholly misleading.

This may be the work of pesky editors (as opposed to Rebecca), but the article quite clearly (and correctly) states that the reduction in lifetime limit is NOT retrospective ... viz. "the earlier claims won’t be disturbed if they fell within the previous lifetime limits".

Thanks (7)
By Dogracer
30th May 2022 10:24

I have already had one of these letters. It was wrong having already claimed up to the £1million and charged full rate on additional gains

The HMRC letter does not state any figures.

One thing to make sure is covered when engaging a new client

Thanks (1)
By HeavyMetalMike
30th May 2022 12:56

I agree with Hugo. I too wasn't aware of anything retrospective.

It's those poxy digital marketeers and editors. And i've fallen for the clickbait too!!

Thanks (1)
By May bee
30th May 2022 15:55

Yes same here, I read twice before I could accept that it is not retrospective... I would hope it's not intentional to drive traffic to the article...

Thanks (1)