The tax office is set to rake in record amounts of inheritance and capital gains tax as it clamps down on everyone from political donors to cryptocurrency investors.
The taxman took more than £5.3 billion from people’s estates in 2017 and projections from the Office for Budget Responsibility suggest that a further £1.2 billion will be collected in inheritance tax (IHT) by the end of this tax year. Meanwhile, HM Revenue & Customs (HMRC) is on course to net £8.8 billion in capital gains tax between now and the end of March, when the majority of the tax is collected.
Sean McCann, a chartered financial planner at NFU Mutual, which published the data, says: “It’s clear that the taxman is cracking down hard on IHT by looking more closely at people’s estates and challenging claims for reliefs. You’d expect that the introduction of the residence nil-rate band would see receipts flatten out or even fall a bit, but the opposite is happening.”
The residence nil-rate band, introduced on April 6 last year, adds an extra £100,000 to the £325,000 IHT-free threshold for those who leave a main residence to a family member.
“When IHT receipts rise, it’s usually because of a buoyant housing market. Yet property prices aren’t rocketing in the same way, so it’s difficult to see what could have caused such a sharp increase in receipts, other than a more aggressive approach. IHT is one of the more complex taxes and there are traps to fall foul of — as many families are finding out,” Mr McCann says.
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It is often assumed that someone must have died for IHT to be due. This is not the case, as donors to EU referendum campaigns, including Arron Banks (a former Ukip donor and co-founder of the Leave.EU campaign) and Peter Cruddas (a banker and leave campaigner) have discovered to their cost. They and several other donors are being chased by the tax office for hundreds of thousands of pounds in unpaid dues. Gifts are usually free of IHT, but amounts in excess of the tax threshold of £325,000 are potentially taxable, even if the gift is made during an individual’s lifetime and no one has died; it depends who has received it. Gifts to individuals are usually exempt, although they could be taxable if the donor dies within seven years of giving. Gifts to some organisations, such as charities and political parties, are also exempt.
Jackie Hall, a tax partner at RSM UK, an auditor, says: “Gifts to political parties are exempt, provided that certain conditions are met. HMRC does not consider pro or anti-Brexit campaigns to meet these conditions and the donations are chargeable lifetime transfers taxable at the current 20 per cent inheritance tax rate, subject to any nil-rate band being available.”
Several donors have called for an amendment to the Finance Bill that would make these donations exempt from tax, in the same way political party donations are, and for the exemption to be back-dated. Ms Hall, however, says that the political ramifications could be huge. “We may well see this tested through the courts instead.”
It is not only political donors who need to be aware of the rules. Hazel Johnson, an associate director at Moore Stephens, an accountant, says: “A lot of private investors are going to need tax advice on their cryptocurrency investments — there are so many potential pitfalls, and costs if they get it wrong. HMRC is actively investigating people who have not paid the right amount of tax on their cryptocurrency gains.
“Many people treat bitcoin income as though it is tax-free and are unaware that they may have made capital gains which should be reported to HMRC.”
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Ms Johnson adds: “If you are a private investor in bitcoin, your profits should not be classed as income, and you will not be liable to income tax. However, HMRC is actively seeking out private investors who make frequent trades. If it decides you are too active, it will try to classify you as a trader, meaning that you will be liable to pay income tax on your profits, instead of capital gains tax. UK-based platforms must provide data to HMRC on all their customers.”
There is some good news: if you inherit bitcoins and pay inheritance tax on their value, but then sell them for less within a year, you can claim back the excess tax.
Last-chance saloon: what you should do before the deadline
By Mark Atherton
The self-assessment tax deadline of January 31 is looming. The penalty for not filing by midnight is £100 plus £10 a day if you still haven’t filed after three months. There are further fines for continued failure to file and defaulters may end up on HM Revenue & Customs’ public “list of shame”. Payment by credit card is no longer allowed and the deadline for paper filing has already passed. To file online you will need your unique taxpayer reference, which can take ten days to get.
Should you do a return?
Charles Calkin of James Hambro & Co, the financial planner, says yes if you were self-employed, earned more than £2,500 in untaxed income (such as renting from a property), received £10,000 or more income from savings or investments or had a capital gains tax liability.
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Also liable are company directors, anyone with a taxable income of more than £100,000, anyone who claimed child benefit when they or their partner earned more than £50,000, people with overseas income which they needed to pay tax on and anyone living abroad who had a UK income.
Claim back relief
If you are a higher-rate taxpayer you should remember to claim back relief on your private pension contributions.
What you will need
If you are employed, dig out your P60 form, showing income and tax deducted and your P11d, listing any taxable benefits such as medical insurance. If you changed jobs you will need your P45. You will need details of income from savings, investments and pensions.
Give payments time to go through
Sarah Coles of Hargreaves Lansdown, a wealth manager, says: “A debit card can take a day, while Bacs transfers and direct debits can take three days. It could take longer if it is the first time you have paid by direct debit.”
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● Interest paid by banks no longer has basic-rate tax deducted at source, because of the new savings personal allowance, and so if a basic-rate taxpayer earns £1,000 or more in interest they may have tax to pay.
