It’s not uncommon for business shares to be put in your name years ago by a parent or spouse, but did you realise selling your stake can trigger Capital Gains Tax (CGT)?
As tax liabilities are often not mentioned, some people might not immediately report the gain to HMRC.
The shares have been sold and the money has hit your account, so what needs to be done now to avoid HMRC ‘failure to notify’ penalties?
How should I notify HMRC about a recent share disposal?
If you are already registered for Self Assessment, you typically need to report a sale of shares using the CGT pages of the tax return.
For those who don’t normally file a Self Assessment, there are two options available.
The first is using HMRC’s ‘real time’ transaction reporting service, which can be used to log gains originating in the current or previous tax year.
If you decide not to use the real-time service, you’ll be required to register for a Self Assessment tax return to disclose the share disposal.
If you have not submitted a tax return in the past, you will need to contact HMRC by 5 October following the end of the tax year you have tax liability to pay.
The gain will then need to be reported on the return by 31 January following the year of assessment.
It is worth considering that a gain from several years ago doesn’t automatically disappear from HMRC’s radar.
Although HMRC might ordinarily only have four years to raise an assessment, this can be extended if a taxpayer has failed to notify them of a tax liability.
What happens if I have forgotten to notify HMRC?
Failing to notify HMRC of a tax liability can result in a penalty, which can differ based on how your behaviour is interpreted and whether you proactively disclosed your mistake.
HMRC categorises behaviour as either deliberate or non-deliberate. Where disclosures of tax liabilities are made, they are either prompted or unprompted.
For example, you could have forgotten to notify HMRC about a share disposal, but you realised your mistake quickly and disclosed it yourself. This might be classed as a ‘non-deliberate unprompted disclosure.’
Penalties for non-deliberate behaviour can range from zero to 30 per cent of the Potential Lost Revenue (PLR), which is the amount of tax that HMRC has lost from a failure to notify.
How can Potential Lost Revenue penalties be reduced?
A penalty can be reduced to nil if you have a reasonable excuse for failing to notify.
However, HMRC often treats the defence of ‘I didn’t know’ or ‘I forgot’ as a poor defence, so how you act when you realise your mistake often carries the most weight.
While non-deliberate behaviour typically yields the lowest penalties, unprompted disclosures to HMRC can help minimise penalties.
This is because prompted disclosures more than 12 months late cannot fall below 20 per cent PLR, even if they are non-deliberate.
What if the failure to notify was deliberate?
Where behaviour is deemed to be deliberate, it is either classed as concealed or not concealed.
You might have intentionally not told HMRC about a tax liability, but did you take active steps to conceal your behaviour?
While the maximum penalty for non-concealed deliberate behaviour is up to 70 per cent of PLR, it can rise to 100 per cent if HMRC believes it to have been actively concealed.
Seeking guidance from a financial expert
Reaching out to an accountant can help you confirm CGT liabilities and calculate how much tax is payable to HMRC.
An accountant can help you determine the correct tax to be paid and ensure it is reported within key deadlines, mitigating the risk of failure to notify penalties.
Where tax liabilities aren’t reported, tax specialists can manage correspondence with HMRC to provide disclosure of mistakes and defend penalty positions.
Unsure if you have a gain to report? Speak to our accountants for expert guidance.
