June Question and Answer Section
Newsletter issue -June 2011.
Q. In 2009 my family and I moved out of the home I owned and rented a house near my daughter's school. I have recently sold the original home. Do I qualify for the capital gains tax exemption on that property, even though I wasn't living in it when it was sold?
A.Yes you do qualify for the tax exemption. As you sold your former home within three years of moving out, all of the gain arising on the sale of property will be exempt from capital gains tax. This assumes you occupied the property for all of the period that you owned it, before you moved out. You do not have to declare the gain on your tax return.
Q. On 15 April 2011 I received severance pay of £80,000 equal to my annual salary, but I was surprised that £23,000 was deducted as tax. I was led to believe the first £30,000 would be tax free and the rest would be taxed at 20%. Can I reclaim the excess tax deducted?
A. It is likely that the first £30,000 of your severance award was tax free, if it was a genuine redundancy payment. This is not always the case as a number of strict conditions must be met.
In the past when such severance payments were paid after the individual had received their P45 form, a BR (basic rate) tax code was applied to the payment which meant only basic rate tax at 20% was deducted. However, since 6 April 2011 employers are required to apply an OT tax code on a month 1 basis to such severance payments. This means that tax is deducted at the basic, higher and additional rates without the benefit of the personal allowances. The month 1 basis means only 1/12 of the basic rate and higher rate limits for the year are taken into account.
The taxable part of your severance payment (£50,000) would have generated a tax deduction of £23,166 using an OT code as follows...
Basic rate: 35000/12 = 2916.67 x 20% = 583.33Higher rate: 115,000/12 = 9583.33 x 40% = 3833.33
Additional rate: (50,000-9583.33-2916.67) x 50% = 18,750.00
Total = £23166.66
You can reclaim the excess tax charged in your tax return for 2011/12.
Q. I've received a letter from the Taxman asking for my tax return for the year to 5 April 2010 to be submitted. But I submitted that tax return in September 2010, and I've paid all the tax due for that tax year. Do I have to submit that form again?
A. No. The letter you have received from the Tax Office is a mistake. About 40,000 of these standard letters (Notices SA316) have been printed with the wrong tax year: 2009/10 rather than 2010/11. You should receive another notice SA316 asking for the tax return for 2010/11, and a letter of apology concerning the mistake.