HMRC has begun writing to taxpayers who claimed Business Asset Disposal Relief (BADR) in their 2024/25 self-assessment tax returns and may have exceeded the £1 million lifetime limit.
What is Business Asset Disposal Relief?
Business Asset Disposal Relief, formerly known as Entrepreneurs’ Relief, is a valuable Capital Gains Tax (CGT) relief available to eligible business owners. When disposing of qualifying business assets, including shares in a trading company, BADR allows taxpayers to pay CGT at a reduced rate rather than the standard rates.
The relief has undergone significant changes in recent years:
- Tax rates: Previously charged at 10%, BADR now applies at 14% for disposals made in the 2025/26 tax year, rising further to 18% from 6 April 2026
- Lifetime limit: Currently set at £1 million, though this was reduced from £10 million in March 2020
Any gains exceeding the £1 million BADR lifetime limit are taxed at standard CGT rates, which from 6 April 2025 are 18% for basic rate taxpayers and 24% for higher rate taxpayers.
Why is HMRC Sending These Letters?
HMRC is actively reviewing self-assessment returns where taxpayers have claimed BADR. Their records indicate that some individuals may have inadvertently claimed relief beyond their available lifetime allowance. This initiative forms part of HMRC’s compliance work to ensure tax reliefs are claimed correctly.
Recipients will receive one of two types of letters, depending on their specific circumstances.
Letter One: Lifetime Limit Already Exceeded
This letter is sent where HMRC’s records indicate that the taxpayer had already exceeded the £1 million lifetime limit before making a claim in their 2024/25 tax return. In this scenario, the entire claim for BADR in the most recent return would be invalid.
The taxpayer is asked to amend their return and remove the claim for BADR entirely, as they have no remaining allowance available.
Letter Two: Limit Exceeded by the Most Recent Claim
The second letter is sent where HMRC believes that the claim made in the 2024/25 tax return has pushed the taxpayer over the lifetime limit. Whilst the taxpayer may have had some remaining allowance, the amount claimed has exceeded what was available.
In this case, the taxpayer is asked to amend their return so that the total BADR claimed for 2024/25 and all earlier tax years remains within the £1 million limit.
Understanding the BADR Lifetime Limit Reduction
The reduction in the lifetime limit from £10 million to £1 million in March 2020 has created particular complexity. Many business owners who claimed BADR before this date may have already utilised their full lifetime allowance without realising it.
If £1 million or more in BADR has been claimed before 11 March 2020, an individual will have exhausted their lifetime allowance. This means no further BADR claims can be made on subsequent disposals, regardless of the size of those claims.
What Action Should You Take?
It is important to respond promptly and carefully.
If they have exceeded their lifetime limit, taxpayers should amend their self-assessment tax returns by the date stated in the letter.
Upon reviewing previous claims, if a recipient believes that they have not exceeded the BADR lifetime limit they should contact HMRC to let them know.
Failure to either amend their returns, or contact HMRC, could either amend the return themselves or even open an enquiry. Interest may also be incurred on any tax which is paid late.
With the BADR rate set to increase in April 2026 and the lifetime limit remaining at £1 million, careful planning has never been more important for business owners considering a disposal.
Given the complexity of BADR rules and the potential tax implications, we strongly recommend seeking professional advice from your accountant. The experienced tax team at Ormerod Rutter can help you to calculate your accurate lifetime limit position, amend your return correctly, if necessary, correspond with HMRC if you disagree with their assessment and calculate any additional tax and interest due.
If you’ve received a letter from HMRC regarding your BADR claim or are planning a business disposal, please contact our team for expert guidance tailored to your specific circumstances. Contact us on 01905 777600 or email hello@ormerodrutter.co.uk for more information.
