Hello All
When we complete and file an online self assessment tax return, personal allowances are automatically allocated to the tax payer during the automated calculation. In normal circumstance, this may be exactly what the tax payer wants.
There is however at least one circumstance (please post any other examples you can think of) when the tax payer would wish to dis-apply/disclaim from use of their personal allowances for that tax year.
Why would the tax payer actually want to dis-apply/disclaim? Well, in the situation where the tax payer wishes to invest in shares under the Enterprise Investment Scheme (EIS) share scheme (say, using funds from savings) yet their income for that tax year is low (less than personal allowances). As a result the tax payer may not pay any income tax in that year, which may be fine from a tax saving perspective however it could (under TCGA 92 S150A (2)) invalidate their capital gains exemptions on any future gains following sale of shares (which otherwise qualify in all other respects).
The question is – how to dis-apply (online ideally) from personal allowances in this scenario? What is the method for dis-applying?
Grateful for any inputs.
Replies (19)
Please login or register to join the discussion.
Is it even possible?
Looking at the legislation, s23 makes provision in step 3 for deducting allowances to which the taxpayer is entitled. No claim needs to be made so the inference may be that it is automatic and cannot be disclaimed.
@Anne and all
Anne - your implication is wrong.
This was posted in the small business group and was advised by Shirley to repost here to seek answers as a more appropriate place.
I am unaware of any way to disclaim the allowance - would be more inclined to create extra income in the year.
Not that easy I know but sometimes by say closing accounts or investments early income can be crystalised , or cash in a policy so there is a chargeable event, or make the investment in a year where there will be enough income to cover
ITA 2007 S35 states that "an individual who makes a claim is entitled to a personal allowance". Therefore no claim, no PA.
In practice it is assumed that no-one would disclaim, so in effect the claim is automatic.
I suppose you would disclaim by writing to HMRC.
Well, you learn something new ...
Never having claimed the PA - for either myself or any client, I wasn't aware of s35. But there you go - if it's given by claim, the claim can be withdrawn. I therefore retract the nonsense that I posted previously.
I can't see how you can disclaim the personal allowance. s.35 just sets the rates and I can't see anywhere legislation that allows you to disclaim.
The claim is automatic unless you fail under the normal rules for eligibility (residency etc).
.
I can't see how you can disclaim the personal allowance. s.35 just sets the rates
But S35 does state "an individual who makes a claim..."
I agree but I think that this is a example of were wording in legislation can be misleading and that "who makes a claim" is aimed at those who don't automatically qualify.
The minute you are brought in to this world you are currently automatically entitled to personal allowances - unless you don't qualify. An individuals circumstances may change enabling them to qualify (i.e they become resident) so that can then make a claim and qualify for the rates set out at s.35.
I suppose I am also talking from a position of never asked for allowances to be disclaimed. So I stand corrected if somebody can say they have done so.
Disclaiming personal allowance
Whether or not anybody has not claimed the personal allowance in the past, the fact is that the legislation does state that a claim is required.
It is, however, assumed, both under PAYE and self-assessment, that a taxpayer that can claim will claim.
The question is why would a person not claim?
Taking a taxpayer in 2014/15 with earned income of £10,000, who has made an SEIS investment of £4,000.
Are we to believe that this person would rather not pay tax in 2014/15 by virtue of a claim for SEIS relief, rather than a claim for the personal allowance, in order that any future gain on the SEIS investment will be exempt, given that:
the effect might be that they will have an additional of £2,000 liability later on if the company fails to qualify as an SEIS company throughout the qualifying period, andthere may never be a gain to exempt, and, if there is, the exemption will be lost if the company has failed to qualify.
Which is it to be? Certainly not pay £2,000 income tax and maybe have a taxable gain? Or maybe pay £2,000 income tax and also maybe have a taxable gain.
Hindsight is a very lovely thing, but in the absence of a crystal ball, I'm claiming the personal allowance.
I think that, unless the OP can highlight some other situation where not claiming the personal allowance is beneficial, there is an inherent defect in the question.
Ok
HMRC would never assume that somebody wants to claim an allowance. So entitlement to an allowance is automatic unless legislation says that a claim first has to be made (and usually specifies a time limit). I don't believe this is what is meant by s.35.
But until someone comes back and says that they have applied not to claim and have been successful I remain unconvinced that it can be done.
Other situations
I think that, unless the OP can highlight some other situation where not claiming the personal allowance is beneficial
I'll give you one - individual with taxable income of £4k and an EIS investment of £100k. Definitely not pay income tax now and potentially exempt a significant gain, or probably pay no income tax now, but potentially have a significant gain? I know what I'd be doing.
Hmmm
I think that, unless the OP can highlight some other situation where not claiming the personal allowance is beneficial
I'll give you one - individual with taxable income of £4k and an EIS investment of £100k. Definitely not pay income tax now and potentially exempt a significant gain, or probably pay no income tax now, but potentially have a significant gain? I know what I'd be doing.
Why should the potential capital gain be any greater on a £100K investment than a £4k investment ? Other than SEIS is more risky than EIS; I could just have easily used a £7,000 EIS investment though. The amount you invest is no indicator of the size of the potential gain; only the potential loss is known.
If after 3 years both my £4,000 SEIS investment and your £100,000 EIS investment are worth £500,000, which is the larger gain?
It still makes no sense to pay tax now out of money you don't have in order to not pay tax later on money that you only might have.
You subscribe for £4k worth of shares and 3 years later they're worth £500k.
I subscribe for £100k worth of shares and 3 years later they're worth £500k.
And you're asking me to say which is the larger gain? Seriously?
Of course size of investment is no indicator of size of potential gain. I was using a larger figure simply on the assumption that a gain on investment of £100k worth of shares is likely to be considerably greater than a gain on £4k of shares in the same company. (Yes, the same logic applies to losses.) It's about measuring the risks against the potential rewards.
Point is that S/EIS is by its nature a gamble. I know which horse I'd be putting my money on - others may be more risk-averse.
EIS3
Fill out the EIS3 and send it to HMRC anyway. As long as you claim for income tax relief, even if it's Nil, a claim is still made the investment will still qualify for CG relief.
Is there any room to make a IT claim in the previous year?
HMRC don't agree with you Craig
Fill out the EIS3 and send it to HMRC anyway. As long as you claim for income tax relief, even if it's Nil, a claim is still made the investment will still qualify for CG relief.
Lou
I was hesitant about it, but something similar that happened at my old place.
It was over 2 years ago but I'll have to rack my brains about the situation.
Apologies, ignore my previous post!