Have you made a profit on an asset?
If you have, it is possible that you will have to pay some Capital Gains Tax (CGT). However, the rules for CGT are complicated and incorporate gains and losses, exempt items, annual allowances and multiple tax rates.
Our guide explains what Capital Gains Tax is and when you have to pay it.
What is Capital Gains Tax?
Capital Gains Tax is a tax on the profit (or ‘gain’) you make when you sell or dispose of an asset. It is not just paid when you sell an asset; it is also paid when you dispose of it in other ways, such as when you:
- Give it away as a gift
- Exchange it for something else
- Transfer it to someone else (except if you are married or in a civil partnership and living together, where you can transfer assets to your spouse or civil partner with no CGT)
- Receive compensation for it (an insurance payout if it is destroyed)
You should remember that you don’t pay Capital Gains Tax on the money you receive for the asset but on the profit that you make.
Do I pay Capital Gains Tax if I make a gain on every asset?
No. There are certain items that are exempt from Capital Gains Tax and these include:
- Your main home (provided certain conditions are met)
- Your car
- PEPs or ISAs
- Lottery, pools or betting winnings
- Money on which you already pay income tax
- Personal belongings worth £6,000 or less when you sell them
How do I work out losses and capital gains?
When you sell or dispose of an asset, you need to work out the gain or loss on each asset separately. You are permitted to deduct any allowable costs associated with acquiring or disposing of the asset.
You then total up all of the individual gains and losses to work out the overall gain or loss for the tax year and the amount of tax due.
Every individual has an annual tax-free allowance for CGT, currently £10,100. This means that you only pay CGT on gains you make over £10,100 in the current tax year.
If you make a loss when you dispose of an asset, you may be able to make a claim for that loss and deduct it from other gains. If you have unused losses from earlier years – and have claimed them in time – you may be able to deduct them too.
What Capital Gains Tax rate do I pay?
For the tax years 2008-09 and 2009-10, Capital Gains Tax is charged at a flat rate of 18 per cent.
However, changes in the 2010 Budget led to the following Capital Gains Tax rates applying from 23 June 2010:
- 18 per cent and 28 per cent tax rates for individuals (the tax rate used depends on the total amount of taxable income)
- 28 per cent for trustees or for personal representatives of someone who has died
- 10 per cent for gains qualifying for Entrepreneurs’ Relief
If you normally complete a Self Assessment tax return, you report your capital gains (or losses) using the additional Capital Gains Tax pages of your tax return. If you do not self-assess, you should report your gains or losses by contacting your Tax Office.
We have just received notification of a new tax refund scam Email circulating around the internet.
If you see the following Email please do not respond to it, and simply mark it as spam.
Let us know if you have received this Email or any similar ones.
Do you need to claim a tax rebate?
If you are employed, you will be paying tax through a system that is almost seventy years old. The Pay as you Earn (PAYE) system was established in the 1940s and in the modern age, PAYE can struggle with ensuring you pay the right amount of tax.
So, it is quite possible that there will be a time when you need to claim a tax refund. Our guide explains how to work out if you are due a tax rebate and how to go about claiming back overpaid tax.
1. Work out if you are due a tax rebate
There are a number of different reasons why you may be due a tax refund. Some common reasons are:
- You had two or more jobs at the same time
- You were only employed for part of the tax year
- You were a student who only worked during the holidays
- You changed from being employed to self-employed part way through the tax year
- You changed from working full time to part time
- You were on an emergency tax code for a period
- Other income included within your tax code (savings or property income) has reduced, meaning your tax code is wrong
2. Collate your tax documents
If any of these situations apply to you, you may be able to claim a tax rebate.
Before you write to your tax office, it is important that you gather together all your tax information. This should include payslips and any P45 or P60 documents that you have.
You may have to provide these documents to substantiate your claim.
3. Work out which tax year you have paid too much tax in
You can claim a tax rebate for four years from the end of the tax year in which you paid too much tax (this may be slightly longer from tax years between 2004/5 and 2006/7).
So, you also need to work out which tax year(s) you have overpaid in. You may have a claim for more than one tax year.
4. Claim a tax rebate for this tax year
If you are an employee and you want to make a claim for a tax refund for this tax year, you should get in touch with your tax office and explain why you think you have paid too much tax. If they do not have all the information needed to check your claim, they may ask you to send some documents (listed above) to them. Any refund will be included with your wages.
Alternatively, you may have become unemployed or have retired during the tax year. In this case, your refund claim depends on your circumstances. These will include whether you are claiming any benefits and whether you are planning to take on a new job.
5. Claim a tax refund for previous tax years
If you think that you have paid too much tax in a previous tax year, you should write to your Tax Office requesting a tax rebate. Include any relevant documentation about your earnings during the tax year for which you are claiming, such as your P60 or P45.
The tax office will look into your query and work out how much they owe you. You will receive any refund due in the post.
Do you need to complete a tax return?
As Ken Dodd once famously remarked, “I told the Inland Revenue I didn’t owe them a penny because I lived near the seaside.” The rules for self-assessment are many and varied and there are lots of reasons why you may be asked to complete a self assessment tax return.
Here are eight common reasons that HMRC may ask you to complete a tax return.
You are self employed
If you are self-employed, you must always complete a tax return. This is also true if you are a member of a partnership.
You are not domiciled in the UK or you have lived or worked abroad
You may be required to complete a tax return if you are:
- Not ordinarily resident in the UK
- A dual resident of the UK and another country
- Not domiciled in the UK and claim the ‘remittance basis’
If you are in one of the above categories, it can be difficult to determine exactly what UK tax you are liable for. You should seek specialist advice.
You have income from overseas
You are obliged to complete a tax return if you receive any foreign income that is liable to UK tax.
Your annual income is over £100,000
You will have to complete a self-assessment tax return if your total income is over £100,000 – even if your tax affairs are otherwise very straightforward.
You are a Lloyd’s name or member, company director or minister
You have to complete your own tax return if you are:
- A company director
- A minister of religion (any faith)
- A name or a member of Lloyd’s
You are a trustee
You will have to complete a tax return if you:
- Manage the tax affairs of a deceased person
- Act as a trustee of certain types of pension scheme
- Act as a trustee or personal representative
You have certain income from property, savings or investments
If you do not already complete a tax return, you will have to do so if any of the following apply to you:
- You have income from untaxed investments and savings of £2,500 or more
- You have income from investments and savings of £10,000 or more
- You have income from property (after deducting allowable expenses) of £2,500 or more
- You have income from property (before deducting allowable expenses) of £10,000 or more
- You receive income from the estate of a deceased person on which tax remains due
You are liable for Capital Gains Tax
Capital Gains Tax is payable on any profits that you make when you dispose of assets, such as shares or a second home. If you have Capital Gains Tax to pay, you will be required to complete a tax return.
September has seen a number of articles written on our site. Some that may be of interest to you include:
Have you been affected by the HMRC tax blunder?
As over 2 million Brits wait to see if they receive a letter telling them they have paid too much or too little income tax, many people are asking how this gigantic mistake could ever have occurred in the first place.
According to an investigation by the Guardian, poor morale, widespread job cuts, poor computer systems and an old-fashioned tax collection system were the root causes of the mistake.
HMRC was created in 2005 after a merger of the Inland Revenue with the old Customs and Excise. In the five years since creation, over 25,000 jobs have been cut from the service. HMRC has also been ranked as the least happy Government department in a Civil Service survey, arguing there was a ‘deep concern about employee engagement’.
A failure of a new computer system to adequately cope with the workload also led to pressure on staff. Peter Lockhart, national officer for the Public and Commercial Services Union, which represents 60,000 HMRC staff, said: “When there are cock-ups in IT, there genuinely aren’t the staff there to fill the void. Over 14 million calls by the public to our call centres went unanswered last year. There just aren’t enough staff any longer to handle a crisis, and this is clearly a crisis.”
Mistakes in tax calculations ‘inevitable’
The UK’s Pay As You Earn (PAYE) tax system was developed almost seventy years ago and has changed little in the meantime. Tax experts therefore acknowledge that the system is out of date and that mistakes are inevitable.
Lesley Fidler, tax partner at Baker Tilly said, “It was a system designed in the days when men – and I use the word men deliberately – had one job and stayed there. It is simply not geared up for a world where people change jobs frequently and may have multiple sources of income.”
In HMRC’s early days, the National Audit Office refused to sign off its account, insisting that officials introduce more sophisticated controls to reduce the number of errors.
The main problem
The biggest issue with PAYE is that tax and national insurance payments made by employers and pension providers to HMRC are only reported once a year. The annual reporting procedure is blamed for resulting in large numbers of people over and under paying tax.
A consultation on the future of PAYE began in July. Iain Duncan Smith, the Work and Pensions Secretary is keen to see a system where the government can adjust tax payments and credits and benefit payments immediately as a person’s income changes.
Until then, there are likely to be continued mistakes as disenchanted staff and an out of date computer system still struggle to cope with modern working patterns.
Do you own one or more properties that you rent out?
If so, the chances are that you will have to complete you own tax return. And, the property section is likely to be one of the most complicated sections that you complete. However, it is important to remember that there are lots of ways that you can reduce your tax liability from rental income. Here are our top three ways to save tax.
Maximise your tax expenses
The best and simplest way to reduce your tax bill is to ensure that you have claimed all the tax expenses you incur in renting out your property. You are able to deduct the following expenses from your rental income:
- Buildings and contents insurance
- Letting agent’s fees
- Interest on any mortgage or loan you have secured on the property
- Maintenance and repairs to the property
- Utility bills and Council Tax
- Ground rent and service charges
- Accountant’s fees
- Other costs of letting the property, e.g. phone calls, advertising
You should remember that only maintenance and repairs are eligible expenses: improvements are not. You can also only claim the expenses you incur solely for letting your property. If the expense is only partly for running your property business, or if you use the property yourself, you may only be cable to claim some of the expenses.
Take advantage of tax allowances on furnished holiday lettings
If the property that you rent out is a ‘furnished holiday letting’, either in the UK or overseas, the tax rules are slightly different.
For your property to qualify as a ‘holiday let’ it must be:
- in the European Economic Area
- commercially let as holiday accommodation at market rates for at least 70 days per year
- available for letting by the general public for at least 140 days per year
If you own a qualifying furnished holiday letting in the UK or in the European Economic Area you can claim a ‘capital allowance’ for the cost of each item of furniture and equipment you provide with the property. Capital costs include expenditure you make on assets like furniture and machinery.
Use the ‘Rent a Room’ scheme
If you already have a lodger or if you are thinking about letting furnished rooms in your home, you can receive up to £4,250 a year tax-free (£2,125 if letting jointly). This is through the Government’s ‘Rent a Room’ scheme.
The room that you let to a lodger must be furnished. However, if you take advantage of this scheme you can receive up to £4,250 of the income you receive tax-free. Any income you receive from lodgers above this amount is taxed in the normal way.
Whatever your property business, make sure that you take advantage of all the property tax allowances and tax expenses that you can. You could save yourself a fortune in tax.
Taxation dates back as far as the Roman invasion of Britain. Even after the fall of the Roman empire, the Saxon kings kept the taxes, known as ‘Danegeld’ on property as well as a number of custom duties on imported and exported products.
The first modern style of income tax was of a very progressive nature, meaning that the rich paid much more than the poor, who often did not have to pay any tax at all. The Poll tax of 1377 saw the Duke of Lancaster paying 520 times the amount of tax of a ‘common peasant’.
The Birth of the Inland Revenue
The first records of the Inland Revenue date back to 1665 where a board was set up to help finance the high cost of the Anglo Dutch War. In previous years there had been riots around the Smithfields area of London because of new taxes which would have forced a family of 4 to starve so it was decided that a government body was needed to help supervise the collection of taxes.
Types of Taxes
A number of taxes, some more controversial than others, were introduced by the government, including the first land tax in 1692. Other taxes included taxes on houses, windows and dogs!
The modern form of income tax that we are all familiar with was first levied in 1797 and was changed a number of times to help pay for the ever increasing cost of the war with Napoleon. The tax was abolished in 1816 due to its huge opposition and all records were destroyed in the hope that income tax would be forgotten!
In 1694 a separate board was set up to help collect stamp duty. The range of products that were subject to stamp duty, increased rapidly through the 18th and 19th century as the governments saw a golden goose to help fund the country’s expansion. Stamp duty was levied on newspapers, advertisements, playing cards, dice, hats and gloves amongst other things. In 1833 the government decided to merge the boards of stamp duty and taxes and in 1834, under the Land Act, the Board of Taxes and the Board of Stamps was officially created.
The Modern Inland Revenue
In 1849 the government created the board for the Inland Revenue after the boards for Excise, Stamps and Taxes were unified. Finally in 1909 the jurisdiction of excise taxes was transferred to a new board known as ‘The Board of Customs and Excise’.
As you can see the Inland Revenue has a long history dating all the way back to the Roman invasion. Tax is now a part of everyday life and it is inevitable we will see many more changes in the future.
Each year everyone that works in the UK receives a tax free allowance, allowing you to earn an amount tax free. Your tax free allowance is usually allocated evenly throughout the year so that you do not receive it in one lump sum.
The new UK government has recently announced changes to the tax free allowance, increasing it from the current rate of £6,475 to £7,475. The increase is great news for low income earners and it will take effect at the start of the new tax year (6th April 2011).
The 15% increase of the personal allowance is a noteworthy change compared to the labour government who decided to freeze the rate from the previous year. Initially the liberal democrats who formed the coalition government with the conservative party wanted to increase the personal allowance to £10,000 but this small increase looks like a compromise.
This change will help everyone apart from the very high earner of the country. People on a low income will benefit especially including:
- Part time workers
- Working students
- People leaving the country
- People retiring from work
If you are reading this blog from abroad, let us know how your countries tax free allowance compares to ours, we would be very interested to know. Do you think the tax free allowance should be increased further?
Although some savings schemes and bank savings plans are tax free, such as cash ISAs, generally any interest you receive on a standard bank account has already been taxed on your behalf at the standard rate of 20%.
If you are a non-taxpayer, for example a child, student or a pensioner on a low income, you need to claim that tax back. Even more importantly, you should make sure that in future, you are paid your interest gross.
How Can I Reclaim That Tax back?
First check on your statement that you have had tax deducted. If the entry is marked ‘net interest’ then you will have had 20% deducted at source on your behalf. You need to contact your local tax office to reclaim the tax paid.
How can I Prevent Tax Being Deducted in Future Years?
Ask at your bank for a form ‘R85 – Getting your interest without tax taken off’. It is a simple form to complete and once done you should not have tax deducted in future. If your circumstances change tax-wise you will need to notify your tax office of the change. If you have children who are non-taxpayers, make sure you complete the form on their behalf.
I Pay A Higher Rate of Tax on my Income. What about my Bank Interest?
Once again you have been taxed at source on any interest credited to your account by the bank. The payment you received is net, not gross, and a standard 20% will have been deducted. If you pay more than 20% tax, you should declare the net interest received on your next tax return and the Inland Revenue will tax you the difference which is due.
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