Disallowed Allowances

/ Accounting, Government, Tax

Author: Jason Burton

Tags: hmrc, Legal, Personal Allowance, Shares, Tax

It isn’t exactly a startling revelation that every UK tax payer can claim personal allowance against their income. As long as you are a UK resident or EU national, you won’t be taxed on the first £11,850 of your earnings for the year (If you earn over £100,000 the allowance is reduced, though!).

Normally, your personal allowance is applied automatically. Although the legislation states that the personal allowance must be claimed, why would you not want to claim money off your tax bill? Well, it turns out that there are rare situations where claiming the personal allowance isn’t actually beneficial!

This has been highlighted by a recent court case. Mr. Robert Ames had purchased EIS shares and sold them at a profit – under normal circumstances this would result in him receiving capital gains tax relief to go with the income tax relief that occurs when buying the shares. However, in this particular instance, they were denied the usual exemption from capital gains tax as the income tax relief was not actually claimed. Why wasn’t it claimed – because you can’t get tax relief when your income is still within the personal allowance and doesn’t qualify for taxation in the first place!

The solution to this issue seems simple – had he disclaimed the personal allowance in the year he made the investment, he could have claimed the EIS income tax relief and the shares would have been exempt from capital gains tax as normal.  Easy, right? Well, it would be if HMRC’s own tax filing software actually allowed you to disclaim your personal allowance – which it doesn’t. Catch 22.

The case really shows just how bonkers and disorganised the UK’s tax system can be. In order to have not been punished by HMRC, Mr. Ames had to make a decision that to all sensibilities seems completely illogical, and would have resulted in him paying income tax on any other income he had irrespective of the personal allowance. It really illustrates the importance of having the advice of a qualified accountant to guide you around the maddening pitfalls.

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