HMRC has confirmed to the Chartered Institute of Taxation that they intend to send ‘nudge letters’ to some taxpayers who sold shares in the year to 5th April 2020. The letters will be targeting those who have made substantial gains during their lifetime and may have exceeded their ‘lifetime allowance’ for Entrepreneurs’ Relief.
Individuals whose tax returns for the year to 5th April 2020 show proceeds from a disposal of shares, and this amount differs from that declared by the acquiring company, are likely to receive the letters.
The letters will be sent to ascertain whether more sale proceeds in the year to 5th April 2020 should have been taxed at the higher 20% Capital Gains Tax rate.
What is Entrepreneurs’ Relief?
Entrepreneurs’ Relief reduces the amount of Capital Gains Tax on a disposal of qualifying business assets on or after 6th April 2008, assuming you have met the qualifying conditions throughout a one-year qualifying period either up to the date of disposal or the date the business ceased trading.
Qualifying capital gains for individuals are subject to a lifetime limit as follows, for disposals on or after:
- 6 April 2008 to 5 April 2010, £1 million
- 6 April 2010 to 22 June 2010, £2 million
- 23 June 2010 to 5 April 2011, £5 million
- 6 April 2011, £10 million
Entrepreneurs’ Relief is available to individuals and some trustees of settlements, but it is not available to companies or in relation to a trust where the entire trust is a discretionary settlement.
Changes to the relief
Entrepreneurs’ Relief was subject to substantial changes in March 2020 when the Chancellor reduced the lifetime allowance from £10m to £1m.
At the time, many business owners were concerned about the changes and the effective increase in CGT rates on a proportion of their sale proceeds from 10% to 20%.
Worrisome for business owners
News of the nudge letters will be a cause for concern for business owners who sold out in the year to 5th April 2020. Those who receive a nudge letter will be encouraged to make a disclosure using the Digital Disclosure Facility.
It is likely that many business owners will have assumed HMRC were satisfied with their tax returns as the normal enquiry window for that tax year is now closed.
Those receiving a letter will need to be well-prepared to provide evidence and potentially fight their case with HMRC that they have paid the correct amounts of tax.
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