Tax Investigation - Ignorance is no excuse

Don't let your ignorance lead to a tax investigation. Here are some facts about capital gains and inheritance tax.

Capital Gains Tax may be due when you sell certain assets, including property (if it is a second home or a rental investment), shares or other investments such as antiques, art and cars. A capital gain is generated when the asset or investment is sold, but gifts and even prizes can also attract Capital Gains Tax. Investigations reveal that Capital Gains Tax only raises around ?2.5 billion a year but to abolish it would open up a tax avoidance loophole that could cost the treasury considerably more.

Capital Gains Tax is charged on the proceeds of a sale, or the market value of a gift, minus its original cost and expenses. This means that if you sell your second home which has appreciated considerably in value, and you don't declare the sale, you could attract a tax investigation - although there is a sliding scale depending on how long you have held the asset - tax matters are never simple!

It's not all bad news though - you are also allowed to keep the first ?8,500 of the profit as a tax allowance, and you can offset other losses against the tax bill and avoid tax investigation. And there are exemptions:

Contractors such as engineers and IT consultants can end up paying significantly larger sums of tax if they are caught by IR35 during the course of a tax investigation. Take home pay can be reduced by up to 25%, and undergoing a tax investigation under IR35 can be an expensive mistake costing you thousands.

Jewellery, paintings and antiques worth less than £6,000
Savings Certificates and Premium Bonds
Betting, lottery or pools winnings

Beware - if you have been lucky enough to receive windfall shares and decide to sell them, you could be open to a tax investigation if you don't declare the full sale value as profit.

Inheritance tax is a form of death duty and affects a growing number of people in the UK - mainly because Inheritance Tax thresholds have not risen in line with house prices. However unfair it seems to have to worry about filling in Inheritance tax forms whilst grieving, failure to do so can result in a tax investigation. Inheritance Tax is payable by your executors, and the current threshold is ?285,000. Anything over this sum will be charged at 40% unless you are leaving it to your spouse or Civil Partner who is resident in the UK. There are ways of avoiding inheritance tax:

Gifts should be given seven years before you die
Each spouse or Civil Partner should use their £285,000 tax-free threshold
Set up a discretionary trust
Will your estate to a charity or political party - they are exempt

In the 2003-2004 tax year, hundreds of fines were imposed following tax investigations

Since the Civil Partnership Act of 2004, gay and lesbian couples now enjoy the rights of married couples, including Inheritance Tax. This recently enjoyed prominence in the press, thanks to two elderly sisters who are taking the British Government to the European Court of Human Rights in Strasbourg to try to get the same rights. Their story is that they both live in the family home, but when one dies the other will be forced to sell in order to pay the Inheritance Tax. Investigations are ongoing, but they argue that they are being penalised because they are co-habiting family members but not a couple. The court will first decide whether it is appropriate to hear the case and any proceedings that follow are likely to take several years to complete.

So remember that the ignorance is no excuse when it comes to tax matters, and it pays to keep up to date with all the current tax allowances if you want to avoid a tax investigation.

If you have received notice from HMRC of a tax investigation or Civil Investigation of Fraud proceedings, call us for help and advice today. All enquiries are strictly confidential, so phone 0800 734 3333 or e-mail scott.gilbert@gilberttax.co.uk now

For more information about the different types of tax investigation cases we deal with on a regular basis please click here.

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