Tax Basics

Now we are on the inevitable countdown to Christmas (only 32 shopping days left. Of course, there are only 32 actual days as well) most of us would rather spend our cash on presents, wine, fun and frolics than in paying a tax bill.

As we all know, January is a long month, culminating in the 31 January income and capital gains tax payments under Self Assessment. However, there are circumstances where certain taxes, including capital gains tax and inheritance tax can be paid by instalments, leaving us a bit extra to spend on tinsel and turkeys.

Capital Gains Tax

Strictly speaking, CGT cannot be paid by instalments -- gains are assessable under Self Assessment and the Self Assessment payment date applies to any tax due.

However, there are certain limited situations where the payment of tax can effectively be spread over a number of years.

The first scenario is where the consideration (or part of the consideration) for the asset is deferred over a number of years. Provided the deferral period exceeds 18 months, the tax due can be spread over a maximum of 8 years, or until the last instalment is received. Amazingly, no interest is charged over the deferral period.

The second situation is where assets have been gifted, such that no actual proceeds have been received. Although CGT gift reliefs may be available, meaning the gain is held over such that it accrues to the gift recipient on their subsequent disposal, if this is not the case, or if these reliefs would be inappropriate, the payment of tax may be spread equally over ten years.

The assets that qualify include:

• land or an interest in land
• shares that gave the donor control immediately before the transfer
• unquoted shares (unfortunately AIM and PLUS shares are quoted for these purposes. Sorry)

Remember though, that HMRC is not normally THAT generous, and that interest will normally be added to all but the first instalment, which will be due on the normal due date for payment of tax (normally 31 January). If the gifted asset is sold, the remaining instalments must be paid up.

Inheritance Tax

Certain inherited assets also qualify for payment of tax by instalments.  Generally these are assets that might take some time to sell, and therefore realise the cash necessary to pay the bill.

Instalments are calculated on a ten-year basis, with one tenth of the outstanding amount due each year. The first instalment is due on the normal due date (no sooner than 6 months after death) and annually thereafter. Again, interest will be added to all instalments bar the first.

The full ten-year period is likely to apply when you inherit an asset, like a house or certain shares, but you do not intend to sell the asset. If you do sell the asset, you must use the proceeds to pay off the remaining instalments.

The assets that qualify include:

• land and buildings (such as the deceased's house);
• certain shares and securities;
• the net value of a business run for profit, but not the business assets; and
• agricultural land and property (where IHT reliefs such as APR/BPR do not apply).

In order to qualify, shares or securities held at the time of death must have enabled the deceased to control the majority (more than 50 per cent) of a company's voting powers.

Unlisted shares or securities where 50% is not held can also benefit from paying by instalments where:

• they are worth more than £20,000 and they represent at least 10 per cent of the 'nominal' value of the company's share capital or at least 10 per cent of the nominal value of the company's ordinary share capital if they're ordinary shares;
• at least 20 per cent of the Inheritance Tax owed by the person liable for the tax must be owed on assets that qualify for payment by instalments, including the shares or securities in question; and
• the Inheritance Tax on the shares or securities could not be paid in one lump sum without causing undue hardship.

The conditions for paying CGT and IHT by instalments are therefore quite restrictive, and may not be of much help to many. Never fear, HMRC are here, offering you the opportunity to pay your tax bill by credit card subject to a 1.25% fee of course.