Under ER the cumulative lifetime limit for qualifying gains was £10 million and had been at this level since 6 April 2011. So a successful businessman (or woman) could buy and sell a few businesses, ramping up cumulative gains of (say) £7.5 million and such gains would all qualify for relief.
When BADR was introduced on 11 March 2020 the cumulative lifetime limit was cut drastically to £1 million. What is not always understood is that the reduced £1 million limit has to include gains arising prior to 11 March 2020. It was a piece of retrospective legislation and it bites unexpectedly.
Example
Jeff had a passion for starting businesses from scratch to exploit market niches that he had discovered, throwing everything at them and then selling on the shares for a substantial sum leaving the purchasers to take the new businesses on to higher levels. His gains to date were:
June 2010 2,000,000
July 2014 3,000,000
December 2019 1,500,000
Total £6,500,000
On 14 April 2020 Jeff sold yet another business for £1,250,000. His accountant claimed the new BADR of £1 million, told Jeff to expect a capital gains tax bill of around £150,000 and explained that further gains on business disposals would not qualify for relief unless the government changed the rules.
Sadly the accountant had overlooked (or never grasped) the fact that Jeff’s cumulative disposals of £6,500,000 far exceeded the new limit of £1 million and that none of the gains relating to the April 2020 disposal qualified for relief. Unfortunately all this came out well after Jeff’s 2020/21 tax return had been submitted and after the normal payment date. A compliance check had been instigated so Jeff was facing interest and penalties as well as the additional tax. It was a sad moment for all.
It is essential that anyone considering a disposal of business assets should check their BADR/ER claim history (back to 2008) and prepare accordingly.
BADR is a valuable relief because it reduces the rate of tax on qualifying business disposals to 10%. It is available to individuals and trusts but not to companies. It is beyond the scope of this note to go into what constitutes qualifying business disposals except to say they apply to:
- A material disposal of business assets.
- A disposal associated with a relevant material disposal.
- A disposal of trust business assets.
If the lifetime limit has been exceeded so that no BADR claims can succeed it may be possible to defer payment of tax by rolling over the gain into the base cost of a replacement business asset. But that, as they say, is another story.
Late News...Just as we were going to press an article has appeared in a professional magazine which reads “HMRC will be reviewing 2020/21 tax returns for individuals who, according to its information, have exceeded their business asset disposal relief or entrepreneurs’ relief lifetime allowance of £1 million. The gains reported in their 2020/21 returns might have taken those individuals over the limit, thus over claiming the relief on part of the gain, or that limit may not have been available before 2020/21 due to their having exceeded the limit in an earlier year. These taxpayers will be asked to check their 2020/21 returns, make any amendments, and inform HMRC. If the taxpayer does not respond HMRC may look into the return and make necessary amendments.” Source – CIOT technical news.
C&H Stedman are ready to advise on all aspects of capital gains tax.
