Writing this in early January I know many people have put off filing their tax returns because they had capital gains.
Like ostriches they are digging their heads in the sand. The subject is complex and often arises only occasionally. As a result people risk missing the deadline or making expensive mistakes on the form.
This is not a year to file your Tax Return late – as it’s the first year of a nasty new regime of penalties. In the past if you filed late and owed no tax, any penalties would be reduced to nil. And at worst there would be two penalties of £100. For the 2010/11 year the penalty is not reduced if your return ends up showing no tax due. Furthermore after 3 months the penalties start to breed and soon you could be nursing a litter of over £1,000 in little penalties. Eye-watering!
Back, then, to capital gains. Capital Gains Tax is the tax you pay is you have made money after disposing of something for more than you paid for it. Note I did not say selling something. You can get hit for CGT even if you gave something away.
An example of this is where you gift your holiday home to your children. As the home is not your main residence it does not benefit from the Private Residence exemption from CGT. However if you gift something to a relative the tax works just as if you sold it for its full market value. This means you might have received nothing but have a hefty tax bill to pay.
If you have a Tax Return to do for 2010/11 (the year to 5 April 2011) and it includes a capital gain then you need to get your skates on. The special Capital Gains pages must be completed if:
- You made gains in 2010/11 of over £10,100, or
- Your proceeds of disposal (or market value) exceeded £40,400.
Note that if you do not normally submit a Tax Return, but you did make capital sales as above, then for this year only you are required to tell HMRC and to submit a Return by 31 January 2012.
The way gains are taxed changed part-way through 2010/11. This is not normal but happened because the new government came in and changed CGT.
In all cases you can make gains of £10,100 before any tax is payable. Unless you have losses from previous years the excess over this amount is taxable.
For sales or disposals up from 6 April 2010 to 22 June 2010 the excess is simply taxed at a flat 18%.
However under George Osborne’s new rules, for sales after 22 June 2010 the excess can have two tax rates applied to it, depending on your income. The gain, after the exemption of £10,100, is added to the top of your income. If the combined total would push you into higher rate tax then some of the gain will be at 28%. If however you normally pay higher rate tax on your income then all the gains above the exemption will face tax at 28%.
So depending on your income, if your gains after 22 June 2010 exceeded £10,100 you might pay CGT at 18%, or some at 18% and some at 28%, or indeed all at 28%. You can read more about how CGT is worked out by clicking here.
The good news, if there is any, is that you don’t have to work out the tax yourself. If you have someone like me do your return for you, we will tell you what tax is payable and at what rates. If you are filing your own return online (since it’s too late to file a paper return) then the HMRC computer will work out the CGT bill.
It is interesting to note that the Conservative Chancellor raised the CGT payable by taxpayers with higher incomes. Not what some people expected of the Tories.
If you need help filing your 2010/11 Tax Return speak up soon. Professional help is still available but you need to be able to supply figures and information pretty quickly. After all the thing needs to be filed online by 31 January 2012.
The time for procrastinating is over.
Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co – www.huston.co.uk or 028 9080 6080.