DMS Posts

Self-Assessment tax return: less fuss if you file early

We know that just the words ‘self-assessment tax return’ uttered in succession can induce feelings of trepidation in those required to file one. This often leads to a reluctance to tackle the task at hand, head-on.

Though the 31st January deadline remains a constant in the tax calendar, procrastination still sees thousands of taxpayers filing their return at the last minute, year in and year out.

As the festive period comes and goes, they watch the days in January tick past until their time is almost up and they eventually conclude that they can’t avoid the inevitable any longer.

If this sounds familiar, revel only briefly in the fact that you are not alone. In January 2018, 2.6 million people had still not filed their return by the 29th January. Over 6% of all returns due were filed in the final 24-hour window – yet, some 745,588 people still missed the deadline completely.

The truth of the matter is, it’s far better to file early than to risk finding yourself in tax-related trouble.

It’s all in the timing…

“Time is what we want most, but what we use worst.”
― William Penn

Preparation and submission of your self-assessment tax return takes time; whether it’s registering for self-assessment (if it’s your first time), sourcing and assembling all the necessary documentation or prospective tax planning.

Be aware of how much of it you have at your disposal and, more importantly, use it wisely. Doing so will undoubtedly give rise to a better outcome than if you find yourself still agonising over the details fifteen minutes before the deadline.

Procrastination = penalties

“You may delay, but time will not.”
― Benjamin Franklin

No matter how long you spend procrastinating, the self-assessment tax return deadline will still arrive at midnight on 31st January 2019, as it supposed to. If, by this time, you have not filed your return, you will unfortunately incur penalties.

The initial penalty for failing to meet the 31st January deadline is £100. After this point, the penalties increase steadily depending on the amount of time that has passed since the deadline.

If HMRC believe you are deliberately neglecting your responsibilities, you may be liable for a fine amounting to 100% of the tax owed.

It’s less fuss if you file early…

“Better three hours too soon than one minute too late.”
― William Shakespeare

Take Shakespeare’s advice and get the ball rolling sooner rather than later. Taking your time, whilst time is on your side, and filing ahead of the deadline can eliminate the frantic fussing and fretting you might otherwise experience if you leave it too late.

Aside from the obvious advantages of being proactive and filing ahead of the deadline, such as avoiding penalties, improved tax planning, time to prepare thoroughly and the ability to budget, it can also give you peace of mind. This can be particularly beneficial during the festive period which, for some businesses, can be their busiest time.

What happens if… I leave my self-assessment tax return until the last minute?

No matter when they are uttered, the words ‘self-assessment tax return’ can often induce feelings of fear and unease in those required to file one. This lack of enthusiasm then often leads to a lot of ‘foot-dragging’.

Though the 31st January deadline remains a constant in the tax calendar, procrastination still sees thousands of taxpayers cutting it fine every year. As Christmas comes and goes, they watch the days in January tick past until their time is almost up and they realise that they can’t avoid the inevitable any longer.

If this sounds familiar, revel only briefly in the fact that you are not alone. In January 2018, 2.6 million people had still not filed their return by the 29th January. Over 6% of all returns due were filed in the final 24-hour window – yet, some 745,588 people still missed the deadline completely.[1]

The truth of the matter is, it’s far better to file early than to risk finding yourself in tax-related trouble. If you still need convincing, then read on…

To file or not to file: How do I know if I’m eligible?

You will need to file a tax return if, in the last tax year:

  • your income from self-employment was more than £1,000
  • you received more than £2,500 from renting out property
  • you received more than £2,500 in other untaxed income
  • your income from savings or investments was £10,000 or more before tax
  • your income from dividends from shares was £10,000 or more before tax
  • you made profits from selling things like shares, a second home or other chargeable assets and need to pay Capital Gains Tax
  • you were a company director – unless it was for a non-profit organisation and you did not get any pay or benefits (e.g. company car)
  • your income (or your partner’s) was over £50,000 and one of you claimed Child Benefit
  • you had taxable income from abroad or if you lived abroad and had a UK income
  • your taxable income exceeded £100,000
  • you were a trustee of a trust or registered pension scheme
  • you had a P800 from HMRC saying you did not pay enough tax last year – and you did not pay what you owe through your tax code or with a voluntary payment
  • your State Pension was more than your Personal Allowance and was your only source of income – unless you started getting your pension on or after 6 April 2016

A comprehensive list of eligibility criteria can be found on the Government website here. HMRC will contact you if they deem that you need to file a tax return; if they haven’t and you think you may be eligible, you should contact them at the earliest opportunity. Likewise, if HMRC have asked you to file a return but you don’t think it applies to you, you should notify them as soon as possible.

Time is of the essence

Preparing your tax return takes time and so you need to ensure that you allow yourself plenty of it.

The first thing to consider is whether you are already registered for self-assessment. If you haven’t filed a return before today, the likelihood is that you will need to register – a process that can take up to two weeks, if not longer.

Once this is done and dusted, the next challenge you face is gathering together all the paperwork required to prepare your tax return; from P45’s, P60’s and P11D’s to expenses, invoices and bank statements. Being organised and keeping your documents in an orderly fashion will drastically reduce the risk of potentially disastrous oversights.

Not only this, but your accountant, if you have one, will need you to hand over all the appropriate documents to accurately complete and submit the return on your behalf before the deadline, so it pays to make sure paperwork isn’t mislaid.

Getting the ball rolling sooner rather than later can also give you the perfect opportunity to budget for your tax bill. It’s as simple as it sounds; if you file six months early, it follows that you have six months to save if you need to.

If all of this isn’t enough to get you motivated, then consider how much nicer Christmas will be without the dreaded 31stJanuary deadline looming over you.

Guilty of procrastinating? You’ll pay for it…

Filing well in advance of the deadline means you have more time to address any issues that do arise and avoid any nasty penalties. For those who aren’t familiar with HMRCs penalties, they are as follows:

  • A £100 fine if you miss the January 31st deadline;
  • £10-per-day fines (for up to 90 days) if you still have not filed by 30th April;
  • whichever is the greater of £300 or 5% of the tax that you owe if you haven’t filed after another 90 days;
  • another £300 or 5% of the tax owed if you still haven’t filed within a year;
  • additional penalties – including up to 100% of owed tax – if HMRC believes you are purposely putting off the filing of your return.

Working close to the deadline also means you have less time to identify any opportunities to compliantly reduce your tax liabilities, meaning you could end up paying more than you need to. Tax returns are as much about effective planning as they are compliance.

The danger of going it alone

The DIY approach to self-assessment tax returns comes with a whole host of potential ‘dangers’ and under all but the simplest of circumstances is best avoided.

When juggling the preparation of your tax return and the day-to-day running of your business, it can be all too easy to miss important details and make costly mistakes. You may also find that you fall into the trap of evaluating your tax affairs purely in terms of the ‘here and now’ and as a result fail to protect your best interests.

You might argue that with so much online guidance available, you would be hard pushed to put a foot wrong – but this is not the case. The content that your search engine returns, for the most part, is designed to appeal to a very ‘standard’ set of circumstances, which your own may not align with.

Is it worth the panic, puzzlement and potential miscalculations?

Silly mistakes can make HMRC suspicious

If you submit your tax return on time, by the skin of your teeth, but it contains errors or anomalies as a result, then that may attract the attention of HMRC. This could prompt HMRC to launch a tax investigation, which can be a lengthy and expensive process.

Work with us = less fuss

As we’ve said already, preparing and filing your tax return takes time; time that would be better spent on running your business. Not only this, but in the absence of expert knowledge and years of experience you run the risk of making costly errors that will ultimately cause delays and leave you feeling unnecessarily stressed. Seeking online help may seem like the obvious answer, but the information is likely to be inadequate.

 

DMS Posts

IR35: Public sector rule roll-out seems inevitable

HMRC has suggested three ways to improve compliance with IR35 in the private sector, none of which will be easy for contractors or their clients to comply with, writes Rebecca Cave.

Unconscious bias

The consultation is titled: Off-payroll working in the private sector. I feel the term “off-payroll working” implies that the correct tax treatment is to always pay the freelance worker through the payroll, which is certainly not true. Is this a case of unconscious bias by HMRC?

HMRC has also provided an IR35 factsheet which seeks to debunk some of the rumours about the IR35 rules which have applied for public sector contracts since April 2017. One of those “facts” is that its check employment status tool (CEST) has been rigorously tested in conjunction with HMRC lawyers against live and settled cases, and reflects employment status case law.

This is a half-truth at best, as independent checking of CEST by Chartergates legal services and ContractorCalculator has found that the tool does not take account of the test of mutuality of obligation (MOO). This is a vital test of self-employment, as was demonstrated by a recent IR35 win for an IT contractor over HMRC.

Whinge city

HMRC justifies changing the way in which the IR35 rules are applied in the private sector because it is time-consuming and expensive for it to investigate IR35 disputes. This, HMRC claims, is largely because every personal service company (PSC) must be investigated independently.

I have always believed that every taxpayer has the right to be considered individually by HMRC, and is thus required to pay tax based on their own circumstances, not according to some blanket categorisation.

HMRC also whinges that the complex supply chains involving multiple agencies means that it finds it hard to collect information from every organisation involved in the contract, and some of those agencies are not always cooperative.

Finally, HMRC complains that when it does win a case and demands back taxes plus interest and penalties, the PSC simply closes down, and the individual worker starts trading through another company. The consultation omits to explain that HMRC has the power to collect the unpaid PAYE, NIC and penalties from the directors in cases where the PSC is forced into liquidation due to deliberate errors or misstatements provided by the directors.

What’s off the table

The consultation is very clear that the underlying rules for establishing employment status will not be changed, and although the Taylor Review has made some suggestions in this area, those are not taken account of in this consultation.

In addition, the following ideas which have been put forward in the past as potential solutions to the IR35 “problem”, are dismissed as being outside the scope of the consultation:

  • Employment status tied to a minimum length of the engagement – with short-term engagements (not specified how short) never classified as employments.
  • A new structure called freelancer limited company – this was suggested by IPSE in 2014 and considered by the OTS in its small company taxation review in 2016.
  • Client tests the employment status of the worker, and if the relationship is employment pays the employer NIC (as under current public sector rules), but the worker would not be subject to PAYE (contrary to current public sector rules).
  • Client withholds tax from the contractor in a similar fashion to CIS deductions – this is a particularly bad idea, as Howard Royse has argued.

Extending public sector rules

This appears to be the favoured option for HMRC, as it believes the tweaked IR35 rules have worked well so far in the public sector.

Moving responsibility for assessing employment status onto the end client means the client will have to rely on CEST to provide an answer in the majority of cases. The consultation is asking for suggestions on how the public sector IR35 rules should be adjusted to work in the private sector.

David Kirk, an expert on IR35 and employment status, made the following points on the extension of the public sector IR35 rules to private sector contracts:

  • There is a distinct lack of public confidence in CEST, which will continue as long as it produces results visibly at variance with what case law would suggest. The most recent case that HMRC have lost (Jensal Technology) was lost on this issue – and in the public sector too.
  • All parties to the contract will have to rely on HMRC guidance on how to account for the tax payments by the client on behalf of the PSC under PAYE. The current HMRC guidance on the public sector rules appears to contravene both the Companies Act 2006 definition of turnover and the FRS 102 definition of revenue. Correcting these points will require a change in the law, which needs to accompany any other changes to IR35.
  • There is also serious lack of public confidence in HMRC’s policing of IR35, which will not be restored as long as they keep on losing cases in the tax tribunal. So far they have lost two cases out of three this year, six cases out of eight since the new tribunal system arrived in 2009, and 12 out of 24 since IR35 came into being in 2000. A record like this suggests that some of the increased compliance that HMRC has noted in the public sector is likely to have come from incorrect categorisation, resulting from misunderstanding of the legal tests.
  • In the private sector, this poor record will encourage those engaging workers to challenge HMRC aggressively in the courts. Less knowledgeable businesses will simply do what they have done in the public sector, which is to shift non-compliance to offshore umbrella companies that HMRC does not have the resources or the legislation to tackle properly.

Secure labour supply chains

An alternative approach suggested by HMRC is to require businesses to audit their labour supply chains, to ensure that all freelancers are complying with the IR35 rules correctly. There is already HMRC guidance on how to undertake due diligence checking on labour supply chains, and HMRC believe that some of these checks could be adapted to the IR35 rules, for example:

David Kirk commented: “These audit requirements would add a complex layer of bureaucracy and would be very unlikely to work in an environment where non-compliance is endemic.”

Additional record keeping

A third alternative approach is to require engagers to keep more records about the contractors they engage, such as copies of contracts, shift rotas, and line management reporting relating to the engagement. If this information was retained, HMRC would be able to quickly gather what it needs directly from the engager should it later open an enquiry into one or more contractors or PSCs.

David Kirk also believes that this level of record keeping simply would not happen in a business that has no other need to keep the information, and where the people who would need to collate it are far removed from the accounting/ tax function. He commented, “compliance officers will never be able to keep up with this, even assuming that they are themselves aware of the issue in the first place.”

Next stage

This is a stage 1 consultation, and as such it focuses on policy design rather than practical aspects of regulation. The “how to” stage will be fleshed out with draft legislation, likely to be released this Autumn, with a view to passing the law in time for implementation from 6 April 2019.

However, if enough respondents emphasis that a longer lead time is needed in order for businesses to properly prepare, and for systems to be changed and tested, the implementation could be pushed back to 2020.

How to respond

HMRC will be conducting roundtable discussions on the issues raises in this consultation with representative bodies, so if your professional body has not been invited to such a discussion ask them why.

You can respond individually by email to: offpayrollworking.intheprivatesectorconsultation@hmrc.gsi.gov.uk

IR35: Public sector rule roll-out seems inevitable

Written by: Rebecca Cave

Tax Writer
Taxwriter Ltd
DMS Posts

Where is the bridging software to plug the MTD gap?

Where is the bridging software to plug the MTD gap?

One of the unresolved mysteries of Making Tax Digital is how and when tools will become available to let businesses transfer spreadsheet-based VAT calculations into the new end-to-end MTD for VAT system.

With the VAT pilot scheme now in its early stages and mandatory online filing less than a year away, the spreadsheet question cropped up again and again in the recent Accounting Excellence Talk on MTD.

During the live webcast, panellist Rebecca Benneyworth explained, “One of the key bits HMRC emphasises in the regulations is that it must be end-to-end digital. It’s fine to take data from some software and then push it through a spreadsheet. If your VAT affairs are extremely complicated, you probably will still have to do that.

“But HMRC says is that is not to be rekeyed. It’s got to be electronically transferred and then submitted from the spreadsheet, or from the spreadsheet back into the product and submitted from that.”

The spreadsheet question is of equal importance to practitioners advising small businesses and large groups with complex VAT arrangements, she continued.

When VAT came up on the rails, she suggested officials visited some large companies to see how they did VAT. In one instance, a company had 23 linked spreadsheets to work out its partial exemptions across the group.

“It was at that point HMRC realised they would have to allow data to pass through spreadsheets,” Benneyworth said.

What is MTD bridging software?

The initial digital taxation proposals cut spreadsheets out of the loop. However, after encountering complex issues such as those described above and intense lobbying from accountants, professional bodies and various select committees HMRC comprised, coining the snappy term ‘bridging software’ in the process.

When HMRC talks about bridging software, this is more than likely to come in the form of an add-in widget that you bolt onto a spreadsheet to transfer the data without rekeying.

Such a solution has been tested on the income tax side, and as the MTD for VAT pilot progresses in the next few months, more such bridging tools are likely to come forward, Benneyworth said.

Companies coming forward

Webcast participant David J asked the panel: “When will HMRC approve software providers’ bridging software for those many many (mostly smaller) clients who rely on Excel spreadsheets for their VAT records and returns?”

HMRC’s answer is that commercial developers will provide the bridging software in time for the April 2019 go-live. Companies such as Clear BooksTaxCalcWolters Kluwer and DataDear are beginning to come forward with solutions.

Clear Books Micro, for example, replaces a client’s Excel spreadsheet with an equivalent, free online grid program to record sales, cash in and expenses, while the £75 TaxCalc VAT Filer app will import VAT data from a spreadsheet to feed an online MTD for VAT submission.

A public sighting at Accountex

MTD bridging software proved to be an elusive creature at last week’s Accountex in London, but some intrepid seekers found their quarry at the stand of DataDear.

An add-on developer for Xero and QuickBooks Online, DataDear starts from the premise that the business will operate its spreadsheet records in tandem with one of the main online systems. Once a basic ledger has been created for the organisation, it will be able to push data from DataDear’s validated spreadsheets to Xero or QuickBooks Online and filed with HMRC from there (the validated sheets will be filled in by the business user/accountant).

Big Four intrigue

For seasoned MTD watchers, one of the more intriguing aspects of the programme is how the Big Four accounting firms will bridge the spreadsheet gap. Serving the richest, most complex multinational clients across a multitude of different tax regimes, they cannot simply adopt a plug-and-play solution and hope for the best.

Rumours have reached AccountingWEB’s ears that at least two of the four are testing bespoke bridging solutions, although no one was available to comment for this article.

John’s ‘Stok-take’ – Bridging software

When the government changed horses from MTD for income tax to MTD for VAT, it seriously wrong-footed almost all of the developers serving the accounting profession. Specialist tax and practice developers understand how to build code around HMRC specs and regulatory requirements and had invested millions in retrofitting their compliance programs for MTD for income tax. All that work is “effectively redundant” in the words of Xero UK managing director Gary Turner as attention turns to VAT.

VAT invoices and returns are normally recorded in bookkeeping applications like Xero, Sage, QuickBooks and the rest. They tell us that all MTD for VAT needs is a little tweak to swap in the MTD equivalent of the VAT 100 return. But with a few exceptions, these developers don’t really get all the workflows, tracking and data queries that go on within a typical accountancy practice.

Specialist practice developers, meanwhile, are all trying to work out how they’ll link to the VAT bookkeeping engines to access filing dates, tax totals and payment details that should be available via HMRC’s emerging application programming interfaces (APIs). Sage, IRIS, Wolters Kluwer all have feet on both sides of the VAT fence and should be able to cater for all requirements. BTCSoftware and TaxCalc have made the necessary arrangements, while Forbes Computer is said to be courting VT Transaction+ users with a spreadsheet bridging tool.

On the ledger side, QuickBooks Online has a two-way interface with Taxfiler (now owned by IRIS), while Xero is working on a partner strategy with the likes of Thomson Reuters and IRIS.

FreeAgent already handles self assessment returns from its bookkeeping platform and has been an MTD enthusiast for years. Like Clear Books, FreeAgent has confirmed it will have an MTD-ready VAT return output option before too long.

As we have seen from the varied bridging tools that have surfaced so far, such a complex combination of situations and applications is spawning all sorts of different technical approaches. Keep an eye on AccountingWEB as the MTD for VAT pilot progresses, when we hope to compile a more detailed guide to the available applications.

 

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Inheritance Tax

Overview

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.

There’s normally no Inheritance Tax to pay if either:

  • the value of your estate is below the £325,000 threshold
  • you leave everything to your spouse or civil partner, a charity or a community amateur sports club

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold will increase to £450,000.

If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £850,000.

Inheritance Tax rates

The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold.

ExampleYour estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).

The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will.

Reliefs and exemptions

Some gifts you give while you’re alive may be taxed after your death. Depending on when you gave the gift, ‘taper relief’ might mean the Inheritance Tax charged is less than 40%.

Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill.

Contact the Inheritance Tax and probate helpline about Agricultural Relief if your estate includes a farm or woodland.

Who pays the tax to HMRC

Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the ‘executor’, if there’s a will).

Your beneficiaries (the people who inherit your estate) don’t normally pay tax on things they inherit. They may have related taxes to pay, for example if they get rental income from a house left to them in a will.

People you give gifts to might have to pay Inheritance Tax, but only if you give away more than £325,000 and die within 7 years.

Passing on a home

You can pass a home to your husband, wife or civil partner when you die. There’s no Inheritance Tax to pay if you do this.

If you leave the home to another person in your will, it counts towards the value of the estate.

If you leave your home to your children (including adopted, foster or stepchildren) or grandchildren, your tax-free threshold will increase to £450,000.

Giving away a home before you die

There’s normally no Inheritance Tax to pay if you move out and live for another 7 years.

If you want to continue living in your property after giving it away, you’ll need to:

  • pay rent to the new owner at the going rate (for similar local rental properties)
  • pay your share of the bills
  • live there for at least 7 years

You don’t have to pay rent to the new owners if both the following apply:

  • you only give away part of your property
  • the new owners also live at the property

If you die within 7 years

If you die within 7 years of giving away all or part of your property, your home will be treated as a gift and the 7 year rule applies.

Call the Inheritance Tax and probate helpline if you have questions about giving away a home. They can’t give you advice on how to pay less tax.

Gifts

There’s usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’.

There’s also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they live in the UK permanently.

Other gifts count towards the value of your estate.

People you give gifts to will be charged Inheritance Tax if you give away more than £325,000 in the 7 years before your death.

What counts as a gift

A gift can be:

  • anything that has a value, such as money, property, possessions
  • a loss in value when something’s transferred, for example if you sell your house to your child for less than it’s worth, the difference in value counts as a gift

Call the Inheritance Tax and probate helpline if you’re not sure.

Exempted gifts

You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.

You can carry any unused annual exemption forward to the next year – but only for one year.

Each tax year, you can also give away:

  • wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
  • normal gifts out of your income, for example Christmas or birthday presents – you must be able to maintain your standard of living after making the gift
  • payments to help with another person’s living costs, such as an elderly relative or a child under 18
  • gifts to charities and political parties

You can use more than one of these exemptions on the same person – for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.

Small gifts up to £250

You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person.

The 7 year rule

If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die.

Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

Years between gift and death Tax paid
less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%

Gifts are not counted towards the value of your estate after 7 years.

When someone living outside the UK dies

If your permanent home (‘domicile’) is abroad, Inheritance Tax is only paid on your UK assets, for example property or bank accounts you have in the UK.

It’s not paid on ‘excluded assets’ like:

  • foreign currency accounts with a bank or the Post Office
  • overseas pensions
  • holdings in authorised unit trusts and open-ended investment companies

There are different rules if you have assets in a trust or government gilts, or you’re a member of visiting armed forces.

Contact the Inheritance Tax and probate helpline if you’re not sure whether your assets are excluded.

When you won’t count as living abroad

HMRC will treat you as being domiciled in the UK if you either:

  • lived in the UK for 15 of the last 20 years
  • had your permanent home in the UK at any time in the last 3 years of your life

Double-taxation treaties

Your executor might be able to reclaim tax through a double-taxation treaty if Inheritance Tax is charged on the same assets by the UK and the country where you lived.

 

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Capital Gains Tax

Overview

Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.

It’s the gain you make that’s taxed, not the amount of money you receive.

ExampleYou bought a painting for £5,000 and sold it later for £25,000. This means you made a gain of £20,000 (£25,000 minus £5,000).

Some assets are tax-free. You also don’t have to pay Capital Gains Tax if all your gains in a year are under your tax-free allowance.

Disposing of an asset

Disposing of an asset includes:

  • selling it
  • giving it away as a gift, or transferring it to someone else
  • swapping it for something else
  • getting compensation for it – like an insurance payout if it’s been lost or destroyed

What you pay it on

You pay Capital Gains Tax on the gain when you sell (or ‘dispose of’):

These are known as ‘chargeable assets’.

Depending on the asset, you may be able to reduce any tax you pay by claiming a relief.

If you dispose of an asset you jointly own with someone else, you have to pay Capital Gains Tax on your share of the gain.

When you don’t pay it

You only have to pay Capital Gains Tax on your total gains above an annual tax-free allowance.

You don’t usually pay tax on gifts to your husband, wife, civil partner or a charity.

What you don’t pay it on

You don’t pay Capital Gains Tax on certain assets, including any gains you make from:

  • ISAs or PEPs
  • UK government gilts and Premium Bonds
  • betting, lottery or pools winnings

When someone dies

When you inherit an asset, Inheritance Tax is usually paid by the estate of the person who’s died. You only have to work out if you need to pay Capital Gains Tax if you later dispose of the asset.

Overseas assets

You may have to pay Capital Gains Tax even if your asset is overseas.

There are special rules if you’re a UK resident but not ‘domiciled’ and claim the ‘remittance basis’.

If you’re abroad

You have to pay tax on gains you make on residential property in the UK even if you’re non-resident for tax purposes. You don’t pay Capital Gains Tax on other UK assets, eg shares in UK companies, unless you return to the UK within 5 years of leaving.

Capital Gains Tax allowances

You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount).

 

The Capital Gains tax-free allowance is:

  • £11,700
  • £5,850 for trusts

You can see tax-free allowances for previous years.

You may also be able to reduce your tax bill by deducting losses or claiming reliefs – this depends on the asset.

Gifts to your spouse or charity

There are special rules for Capital Gains Tax on gifts or assets you dispose ofto:

  • your spouse or civil partner
  • charity

The normal rules apply for gifts to others.

Your spouse or civil partner

You don’t pay Capital Gains Tax on assets you give or sell to your husband, wife or civil partner, unless:

The tax year is from 6 April to 5 April the following year.

If they later sell the asset

Your spouse or civil partner may have to pay tax on any gain if they later dispose of the asset.

Their gain or loss will be calculated from when you or they first owned it.

If this was before April 1982, your spouse or civil partner should work out their gain using the market value on 31 March 1982 instead.

They should keep a record of what you paid for the asset.

Gifts to charity

You don’t have to pay Capital Gains Tax on assets you give away to charity.

You may have to pay if you sell an asset to charity for both:

Work out your gain using the amount the charity actually pays you, rather than the value of the asset.

Work out if you need to pay

You need to pay Capital Gains Tax when you sell an asset if your total taxable gains are above your annual Capital Gains Tax allowance.

Work out your total taxable gains

  1. Work out the gain for each asset (or your share of an asset if it’s jointly owned). Do this for the personal possessionssharesproperty or business assets you’ve disposed of in the tax year.
  2. Add together the gains from each asset.
  3. Deduct any allowable losses.

The tax year runs from 6 April to 5 April the following year.

You’ll need to report and pay Capital Gains Tax if your taxable gains are above your allowance.

If your total gains are less than the tax-free allowance

You don’t have to pay tax if your total taxable gains are under your Capital Gains Tax allowance.

You still need to report your gains in your tax return if both of the following apply:

  • the total amount you sold the assets for was more than 4 times your allowance
  • you’re registered for Self Assessment

There are different rules for reporting a loss.

If you’re non-resident

You need to tell HMRC when you sell residential property even if your gain is below the tax-free allowance or you make a loss. Non-residents don’t pay tax on other capital gains.

Report and pay Capital Gains Tax

You can report any Capital Gains Tax you need to pay either:

  • straight away using the ‘real time’ Capital Gains Tax service
  • annually in a Self Assessment tax return

If you use the ‘real time’ service but need to send a tax return for another reason, you’ll have to report your gains again through Self Assessment.

If you’re a non-resident and you’ve sold a residential property in the UK, tell HM Revenue and Customs (HMRC) within 30 days, even if you have no tax to pay.

Before you report

You’ll need:

  • calculations for each capital gain or loss you report
  • information from your records about the costs and what you received (the ‘proceeds’) for each asset
  • any other relevant details, such as any reliefs you’re entitled to

Report your gain and pay straight away

You can use the ‘real time’ Capital Gains Tax service if you’re a UK resident. You’ll need a Government Gateway account – you can set one up from the sign-in page.

When you use the service you’ll need to upload PDF or JPG files showing how your capital gains and Capital Gains Tax were calculated.

When to report

You can use this service as soon as you’ve calculated your gains and the tax you owe. You don’t need to wait until the end of the tax year.

You must report by 31 December after the tax year when you had the gains.

The tax year runs from 6 April to 5 April the following year.

After you’ve reported your gains, HMRC will send you a letter or email giving you a payment reference number and telling you ways to pay.

Report in a Self Assessment tax return

You can file a Self Assessment tax return to report your gain in the tax year after you disposed of assets.

If you don’t usually send a tax return, register for Self Assessment after the tax year you disposed of your chargeable assets.

If you’re already registered but haven’t received a letter reminding you to fill in a return, contact HMRC by 5 October.

You must send your return by 31 January (31 October if you send paper forms).

You can get help with your tax return from an accountant or tax adviser.

After you’ve sent your tax return

HMRC will tell you how much you owe. The Capital Gains Tax rate you pay depends on your Income Tax rate.

You’ll need to pay your tax bill by the deadline.

You’ll have to pay a penalty if you send your tax return late, miss the payment deadline or send an inaccurate return.

Capital Gains Tax rates

You pay a different rate of tax on gains from residential property than you do on other assets.

You don’t usually pay tax when you sell your home.

If you pay higher rate Income Tax

If you’re a higher or additional rate taxpayer you’ll pay:

  • 28% on your gains from residential property
  • 20% on your gains from other chargeable assets

If you pay basic rate Income Tax

If you’re a basic rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets.

  1. Work out how much taxable income you have – this is your income minus your Personal Allowance and any other Income Tax reliefs you’re entitled to.
  2. Work out your total taxable gains.
  3. Deduct your tax-free allowance from your total taxable gains.
  4. Add this amount to your taxable income.
  5. If this amount is within the basic Income Tax band you’ll pay 10% on your gains (or 18% on residential property). You’ll pay 20% (or 28% on residential property) on any amount above this.

Example

Your taxable income (your income minus your Personal Allowance and any Income Tax reliefs) is £20,000 and your taxable gains are £12,300. Your gains aren’t from residential property.

First, deduct the Capital Gains tax-free allowance from your taxable gain. For the 2018 to 2019 tax year the allowance is £11,700, which leaves £600 to pay tax on.

Add this to your taxable income. Because the combined amount of £20,600 is less than £45,000 (the basic rate band for the 2018 to 2019 tax year), you pay Capital Gains Tax at 10%.

This means you’ll pay £60 in Capital Gains Tax.

If you have gains from both residential property and other assets

You can use your tax-free allowance against the gains that would be charged at the highest rates (for example where you would pay 28% tax).

If you’re a trustee or business

Trustees or personal representatives of someone who’s died pay:

  • 28% on residential property
  • 20% on other chargeable assets

You’ll pay 10% if you’re a sole trader or partnership and your gains qualify for Entrepreneurs’ Relief.

If you make a loss

You can report losses on a chargeable asset to HM Revenue and Customs (HMRC) to reduce your total taxable gains.

Losses used in this way are called ‘allowable losses’.

Using losses to reduce your gain

When you report a loss, the amount is deducted from the gains you made in the same tax year.

If your total taxable gain is still above the tax-free allowance, you can deduct unused losses from previous tax years. If they reduce your gain to the tax-free allowance, you can carry forward the remaining losses to a future tax year.

Reporting losses

Claim for your loss by including it on your tax return. If you’ve never made a gain and aren’t registered for Self Assessment, you can write to HMRCinstead.

You don’t have to report losses straight away – you can claim up to 4 years after the end of the tax year that you disposed of the asset.

There’s an exception for losses made before 5 April 1996, which you can still claim for. You must deduct these after any more recent losses.

Losses when disposing of assets to family and others

Your husband, wife or civil partner

You usually don’t pay Capital Gains Tax on assets you give or sell to your spouse or civil partner. You can’t claim losses against these assets.

Other family members and ‘connected people’

You can’t deduct a loss from giving, selling or disposing of an asset to a family member unless you’re offsetting a gain from the same person.

This also applies to ‘connected people’ like business partners.

Connected people

HMRC defines connected people as including:

  • your brothers, sisters, parents, grandparents, children and grandchildren, and their husbands, wives or civil partners
  • the brothers, sisters, parents, grandparents, children and grandchildren of your husband, wife or civil partner – and their husbands, wives or civil partners
  • business partners
  • a company you control
  • trustees where you’re the ‘settlor’ (or someone connected to you is)

Claiming for an asset that’s lost its value

You can claim losses on assets that you still own if they become worthless or of ‘negligible value’.

HMRC has guidance on how to make a negligible value claim.

Special rules

HMRC has guidance on the special rules for losses:

Record keeping

You need to collect records to work out your gains and fill in your tax return. You must keep them for at least a year after the Self Assessment deadline.

You’ll need to keep records for longer if you sent your tax return late or HM Revenue and Customs (HMRC) have started a check into your return.

Businesses must keep records for 5 years after the deadline.

Records you’ll need

Keep receipts, bills and invoices that show the date and the amount:

  • you paid for an asset
  • of any additional costs like fees for professional advice, Stamp Duty, improvement costs, or to establish the market value
  • you received for the asset – including things like payments you get later in instalments, or compensation if the asset was damaged

Also keep any contracts for buying and selling the asset (for example from solicitors or stockbrokers) and copies of any valuations.

If you don’t have records

You must try to recreate your records if you can’t replace them after they’ve been lost, stolen or destroyed.

If you fill in your tax return using recreated records, you’ll need to show where figures are:

  • estimated – that you want HMRC to accept as final
  • provisional – that you’ll update later with the actual figures

Market value

Your gain is usually the difference between what you paid for your asset and what you sold it for.

There are some situations where you use the market value instead.

Situation Use market value at
Gifts Date of gift
Assets sold for less than they were worth to help the buyer Date of sale
Inherited assets where you don’t know the Inheritance Tax value Date of death
Assets owned before April 1982 31 March 1982

Checking the market value

HM Revenue and Customs (HMRC) can check your valuation.

After you’ve disposed of the asset, complete a ‘Post-transaction valuation check’ form. Return it to the address on the form – allow at least 2 months for HMRC’s response.

 

 

DMS Posts

Income Tax rates and Personal Allowances

Current rates and allowances

How much Income Tax you pay in each tax year depends on:

  • how much of your income is above your Personal Allowance
  • how much of your income falls within each tax band

Some income is tax-free.

The current tax year is from 6 April 2018 to 5 April 2019.

Your tax-free Personal Allowance

The standard Personal Allowance is £11,850, which is the amount of income you don’t have to pay tax on.

Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance. It’s smaller if your income is over £100,000.

Income Tax rates and bands

The table shows the tax rates you pay in each band if you have a standard Personal Allowance of £11,850.

Income tax bands are different if you live in Scotland.

Band Taxable income Tax rate
Personal Allowance Up to £11,850 0%
Basic rate £11,851 to £46,350 20%
Higher rate £46,351 to £150,000 40%
Additional rate over £150,000 45%

You can also see the rates and bands without the Personal Allowance. You don’t get a Personal Allowance on taxable income over £123,700.

If you’re employed or get a pension

Check your Income Tax to see:

  • your Personal Allowance and tax code
  • how much tax you’ve paid in the current tax year
  • how much you’re likely to pay for the rest of the year

Other allowances

You have tax-free allowances for:

You may also have tax-free allowances for:

Find out whether you’re eligible for the trading and property allowances.

You pay tax on any interest, dividends or income over your allowances.

Paying less Income Tax

You may be able to claim Income Tax reliefs if you’re eligible for them.

If you’re married or in a civil partnership

You may be able to claim Marriage Allowance to reduce your partner’s tax if your income is less than the standard Personal Allowance.

If you don’t claim Marriage Allowance and you or your partner were born before 6 April 1935, you may be able to claim Married Couple’s Allowance.

Previous tax years

The standard Personal Allowance from 6 April 2017 to 5 April 2018 was £11,500.

Tax rate Taxable income above your Personal Allowance for 2017 to 2018
Basic rate 20% £0 to £33,500
People with the standard Personal Allowance started paying this rate on income over £11,500
Higher rate 40% £33,501 to £150,000
People with the standard Personal Allowance started paying this rate on income over £45,000
Additional rate 45% Over £150,000

ExampleYou had £35,000 of taxable income and you got the standard Personal Allowance of £11,500. You paid basic rate tax at 20% on £23,500 (£35,000 minus £11,500).

Your Personal Allowance would have been smaller if your income was over £100,000, or bigger if you got Marriage Allowance or Blind Person’s Allowance.

Other rates and earlier tax years

HM Revenue and Customs (HMRC) publishes tables with full rates and allowances for current and past tax years.

Income over £100,000

Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £123,700 or above.

You’ll also need to do a Self Assessment tax return.

If you don’t usually send a tax return, you need to register by 5 October following the tax year you had the income.

 

DMS Posts

The big IR35 consultation

HMRC has published its keenly awaited consultation on the future of IR35. Radical changes are ahead for some freelancers and those who hire them. How could you be affected?

Consultation. On 18 May 2018 HMRC published its long-awaited consultation on the future of IR35 (see link below) . This makes clear that the public sector rules which were introduced in April 2017 will be extended to the private sector, but probably with a few minor changes.

Public bodies. The April 2017 changes shifted responsibility to public bodies for deciding if freelance contractors they use are caught by IR35 , rather than it being a question for those doing the work. Faced with fines for getting it wrong, many public bodies have either assumed IR35 applies or changed their working practices by not hiring freelancers.

Fine tuning. Naturally, HMRC is very happy with the 2017 changes and wants to see them rolled out to the private sector. However, there are shortcomings in the public sector model which even HMRC recognises. Therefore, much of the consultation is devoted to asking for suggestions on how it can be improved before being rolled out.

No change. Importantly, the consultation says that the rules for determining if IR35applies won’t be changed. This will still depend on whether the person doing the work would be self-employed if they worked for the client directly, i.e. not through their company or partnership.

When and how? Our guess is that the changes resulting from the consultation won’t take effect until April 2020. But if you want to have your say on how they take shape, you have until 18 August 2018 to submit your comments. Tip. If you use freelancers who work through a company or partnership, use the time before any new rules are implemented to review the contracts and terms of work to ensure that IR35 won’t apply. Loosening the level of control you have over the workers and how they do their job will be key to this.

The question of whether IR35 applies will be shifted from the worker to the hirer as is currently the case for public bodies. This will probably happen in 2020.