Tax Glossary
Welcome to the our Tax Glossary. To help you interpret the jargon that you can come across in dealing with your tax, our team of experts have written a brief explanation for hundreds of technical terms. Click on a letter to show entries.
When an asset is used for business purposes, the purchase cost is not normally allowable as an expense. This is because the asset still has a value after it has been used.
However, the value of the asset will decrease over time. An allowance to reflect this depreciation can be claimed instead. This is known as a capital allowance.
Costs taken into account when calculating CGT include : Acquisition and disposal costs: Such as the associated costs of buying and selling the asset (e.g.broker's fees for shares). Enhancement costs: Any amounts spent on improving the asset.
A CGT declaration is only obligatory where there is a chargeable gain of more than the annual exempt amount (2011/12= £10,600 and 2010/11 = £10,100), or where assets were disposed of which were worth more than four times that amount in the year.
In relative terms, £100 was worth more ten years ago than today. Indexation adjusted for this increase in the cost of living within CGT calculations by reducing the profit in real terms, based on changes in the Retail Price Index.
Up to 5 April 2008 for gains on disposals by individuals an indexation allowances was given up to 5 April 1998 for assets held prior to this date and taper relief applied thereafter. Tax was charged on these gains at the taxpayers marginal rate of 10%, 20% or 40%.
For disposal on or after 6 April 2008 indexation allowance and taper relief are no longer available. Tax is charged on gains at a standard rate of 18%, except where the gain qualifies for entrepreneurs relief, see separate glossary entry.
There are various reliefs that may be available to reduce the capital gains tax liability on the sale or gift of an asset. You should seek professional advise to determine whether any relief is due.
If you own an asset that has gone up in value which you sell for a profit, you may need to pay Capital Gains Tax (CGT).
On its most simple level, CGT is the tax payable on the increase in value of an asset over the period it is owned. (see Capital Gains Tax - Calculations.)
CGT is not strictly the same as Income Tax, although it is dealt with at the same time.
Gains arising between 6 April 2008 and 22 June 2010 are charged at a standard rate of 18% (10% for some - see entrepreneurs relief). From 23 June 2010 the standard rate of 18% will only apply where the individual's total taxable income and gains after allowable deductions are below the upper limit for basic rate income (£37400 for 2010/11 but only £35,000 for 2011/12). Where the whole gain or any part of the gain exceeds this limit, tax will be charged at 28%. Again the see entrepreneurs relief for details of gains chargeable at 10%.
For tax years up to 2007/08 gains were treated as the top slice of income and charged at 10%, 20% or 40%.
CGT is charged on profits made when something is sold - essentially the selling price less purchase price.
Adjustments are made to this amount for amounts spent improving the asset, and costs incurred buying or selling the asset.
After working out the profit, or chargeable gain, the annual exempt amount is deducted. Tax is payable only if the profit exceeds this amount.
When an asset is sold for less than the acquisition cost, a capital loss has arisen.
This loss can be set against any capital gains arising in the same year or can be carried forward to set against future capital gains. In some cases, though not commonly, it can be set against other income in the same year.
Unlike salary or wages, when an employee receives a taxable company benefit, there is no money on which tax can be calculated.
Instead, the employer works out the cash equivalent of the benefit. This may be the cost to the employers, but in many cases it is the result of a complex calculation.
The employee pays tax on this amount as though it was actually cash.
When you do a job on an irregular basis, the earnings are classed as casual earnings.
This should not be confused with the term "black economy", which refers more specifically to undeclared irregular earnings.
It is possible to pay a large tax bill in advance by purchasing a Certificate of Tax Deposit from H M Revenue & Customs. This gives a good rate of interest, running from the date of purchase to the date the tax is due. Unfortunately, the interest is still taxable
Capital gains tax only applies if the item sold is a chargeable asset.
The most commonly sold chargeable assets are shares. Other such assets include, properties held for rental, business assets, second homes and other assets worth more than £6000.
Non-chargeable assets include your main home, your own car, investments held in PEPS, and personal assets worth less than £6000.
Confusingly, this has nothing to do with capital gains tax.
A chargeable event happens when money or other benefits are paid out from a life insurance policy, and the payment is deemed taxable. (Most payments from qualifying life insurance policies are not classed as chargeable event gains)
The rules are complex, but the insurance company should advise if a chargeable event has arisen, and how much the taxable element is.
In any event, a tax credit is given on the chargeable gain, and only those liable to higher rate tax on their total income including this will pay additional tax
This is the profit made on disposal of an asset.
Any amount over and above the annual exemption limit (currently £10,600 for 2011/12 and £10,100 for 2010/11) will be charged to capital gains tax.
Tax relief is available on payments made to approved charities. In the past, if this was done via a covenant, specific criteria had to be met. From 6 April 2001 though, all payments to charity are treated in the same way. See Charitable Gifts Relief.
Tax relief at the payers top tax rate is available for charitable donations under the gift aid scheme. To qualify for the relief donors are required to make a declaration. Donations are treated as being net of basic rate tax, but in order to retain the tax relief, donors must be liable to pay an equivelent amount of income tax. A taxpayer may claim to have the donation treated as if it had been made in the previous tax year and to do this a claim must be made no later than the date the tax return for the previous year is filed BUT filed no later than 31 Jan.
A party to a formal civil partnership.
A formal partnership between same sex couples. A civil partnership is treated in the same way as a marriage for all tax purposes.
There are a number of classes of company.
To be a close company, it must be controlled by no more than 5 shareholders. This covers most private companies in the UK. The term applies in such areas as capital gains and when claiming tax relief on a loan to buy shares in the company.
In most cases, if you are not resident in the UK, no tax allowances are available to you. However, up to 5 April 2010 Commonwealth Citizens, including British Citizens, qualified for full allowances even when overseas. From 6 April 2010 this has now changed and those who previously qualified for the allowance purely because they were commonwealth citizens living in the following area will no longer receive the allowance.
Bahamas, Cameroon, Cook Islands, Dominica, Maldives, Mozambique, Nauru, Niue, St Lucia, St Vincent & the Grenadines, Samoa, Tanzania, Tonga and Vanuatu
Perhaps the most common way this affects people is where a pension is paid in the UK to a person who has retired overseas.
Every day travel to work is not usually allowable for tax purposes.
Exceptions may apply when a workplace is temporarily moved, or where a person works from home and travels to various customers.
When your employer provides you with a car that you can use for your own private use, a taxable benefit arises. Special rules are used to work out the amount of the benefit, see the car benefit calculator.
There are many forms of compensation, some of which will be subject to tax, and others which will not.
