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Capital Gains Tax Question

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Say I buy a pen or anything for….. 10p and hold onto it for a day and then sell it to my business for £10k as opposed to drawing that £10k as a wage. In that example I would be liable for capital gain tax instead of income/NI tax correct?

Then practically all my income could be converted to capital gains instead of income and taxed at the current CGT rate?

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Smells like fraud to me, how close to the sun do you like to fly? Point two who is going to buy a business for 10k who's total assets consists of a pen?

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Smells like fraud to me, how close to the sun do you like to fly? Point two who is going to buy a business for 10k who's total assets consists of a pen?

I think you misunderstood my question

Say a business has £10k cash from profits, that can either be drawn as a wage and 20-40% income tax + NI paid.

Alternatively that business can buy a pen, a nice pen and pay £10k for it.

Well lets say I sold them that pen, which I bought for 10p

Basically what I am saying is that it seem very easy and legal to convert income into capital gains.

So am I missing something here or is it indeed this easy and legal?

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I think you misunderstood my question

Say a business has £10k cash from profits, that can either be drawn as a wage and 20-40% income tax + NI paid.

Alternatively that business can buy a pen, a nice pen and pay £10k for it.

Well lets say I sold them that pen, which I bought for 10p

Basically what I am saying is that it seem very easy and legal to convert income into capital gains.

So am I missing something here or is it indeed this easy and legal?

There are numerous ways of converting income to capital, I know of a couple, but I don't think they would help you in your situation. I don't think this is one that would get passed HMRC if they knew about it. In any case, you would need to then get a deduction for the loss the company made on the pen, this would either be capital allowances (very slow and admin burden) or immediately write the value of the pen down to 10p. This is likely to raise a flag.

If you are a director or shareholder of the company, you are on even shakier ground as there are disclosure rules about these transactions.

Nice idea, but I don't think its a winner.

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One point is that you wouldn't pay PAYE on the £10k, you'd normally be paying corporation tax at 20% on the dividend.

Not so appealing as opposed to 18% on the capital gain.

Plus the pen would become a £10k asset on the books of the company which you'd have to write down over time. Not sure how this affects things.

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There are numerous ways of converting income to capital, I know of a couple, but I don't think they would help you in your situation. I don't think this is one that would get passed HMRC if they knew about it. In any case, you would need to then get a deduction for the loss the company made on the pen, this would either be capital allowances (very slow and admin burden) or immediately write the value of the pen down to 10p. This is likely to raise a flag.

If you are a director or shareholder of the company, you are on even shakier ground as there are disclosure rules about these transactions.

Nice idea, but I don't think its a winner.

What part of the idea is illegal and why would you need to get around HMRC, if it is legal it is legal. I am not trying to think of a scam or trick just if this is legal or not.

As far as I can see it isn’t illegal in any way but I posted the question just in case I missed anything.

BTW how do you even differentiate between income and capital gains.

If a shop keeper buys a can of coke for 25p and sells it for 50p is that a capital gain or income?

Well logically it seems capital gains are income however the tax system treats them differently.

So anyone know for sure? Any accountants or tax lawyers around?

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One point is that you wouldn't pay PAYE on the £10k, you'd normally be paying corporation tax at 20% on the dividend.

Not so appealing as opposed to 18% on the capital gain.

Plus the pen would become a £10k asset on the books of the company which you'd have to write down over time. Not sure how this affects things.

Yes you would pay 20% in corporation tax via the dividend but then get taxed on that as income so a £10k profit would go to £8k which would then be income taxed down further

With capital gains that £10k is reduced by only the 18% plus you get 10k or so tax free.

Also you wouldn’t need to write down anything, just sell the pen onto someone else for 10p and put it in your companies general income.

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What part of the idea is illegal and why would you need to get around HMRC, if it is legal it is legal. I am not trying to think of a scam or trick just if this is legal or not.

As far as I can see it isn’t illegal in any way but I posted the question just in case I missed anything.

BTW how do you even differentiate between income and capital gains.

If a shop keeper buys a can of coke for 25p and sells it for 50p is that a capital gain or income?

Well logically it seems capital gains are income however the tax system treats them differently.

So anyone know for sure? Any accountants or tax lawyers around?

Well, its illegal because you are transferring assets at something other than market rate between connected parties (not sure of the exact rules but they do exist and probably apply in this scenario). Look up transfer pricing.

There are well established rules to differentiate between capital and income e.g. frequency of transactions, is it your business etc. An example would be antiques, is you buy one or two a year, and sell one or two a year, and it is not your main source of income then its likely to be treated as capital. If you are an antiques dealer, then this is your trade and is almost certain to be treated as income.

I am an accountant and do some tax work, but tax is a big area and this is not one that I get involved with through work.

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Well, its illegal because you are transferring assets at something other than market rate

Ok that makes sense.

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Ok that makes sense.

Not quite.

A transaction is 'otherwise than by way of a bargain made at arm's length' when one of the persons involved in the transaction does not intend to get the best deal for themselves from THAT PARTICULAR TRANSACTION. That person enters into the transaction with the subjective intention of giving some gratuitous benefit to the other person.

WHERE ONE OF THE PARTIES TO A TRANSACTION HAS THE INTENTION OF CONFERRING A GRATUITOUS BENEFIT ON ANOTHER PARTY TO THE TRANSACTION THEN THE TRANSACTION IS OTHERWISE THAN BY WAY OF A BARGAIN MADE AT ARM'S LENGTH AND THE MARKET VALUE RULE APPLIES.

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  • 246 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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