Contractors who have set themselves up as limited companies and are suspected of breaching the £1 million Business Asset Disposal Relief (BADR) limit are receiving warnings from HMRC.
These ‘Please check your Business Asset Disposal Relief claim’ letters were received by company directors in January this year, and our advice is that if you’ve received one, you should respond to HMRC promptly.
What is the BADR limit?
Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief (ER)) reduces the amount of Capital Gains Tax levied against a disposal of qualifying business assets when the proceeds of that disposal are high enough to take an individual into the next tax bracket.
BADR can be applied to disposal of:
- A sole trade and its assets
- Partnership interests and assets
- Shares in your company
- Joint venture interests
- Business assets held by a trust
When claimed, BADR reduces the rate of CGT payable on those assets to 10%—but there’s a lifetime limit of qualifying capital gains that is currently £1 million. This limit was reduced dramatically in 2020, having previously stood at £10 million, which has caught out a lot of directors who weren’t aware of the change.
What to do if you receive a BADR ‘nudge’ letter
There’s no penalty for individuals that ignore the nudge letters, but although they’re not formal enquiries into your tax return, failure to reply could make it more likely that HMRC opens an enquiry. In the event that a subsequent investigation shows that the BADR claim is invalid, failing to reply may be a contributing factor to a higher penalty being imposed.
With this in mind, you should be diligent in checking how much you’ve claimed previously before making any further claims and, as we stated above, it’s best to respond promptly to HMRC if you’ve received one of these letters.
BADR rate to increase from 6th April 2025
The CGT rate reduction is also set to drop from 6th April 2025, with the 10% rate increasing to 14% this year, and by a further four percentage points to 18% from 6th April 2026. This is expected to impact over 260,000 individuals over the next two years.
Need professional advice? Here at Warr & Co we can help you to ensure you don’t make invalid BADR claims, and stay on top of your Capital Gains Tax obligations more generally. We have extensive experience of working with contractors and small businesses, and we’ll help you to ensure maximum tax efficiency while remaining within the law.
To find out more about how we can help, why not get in touch today, or book your free contractor accounting consultation now.
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