Record keeping for Capital Gains Tax
Remembering which documents to retain for income tax purposes is not difficult, mainly because similar information is usually required each year. However, record keeping for capital gains tax is more problematic not only because other than share sales, the disposals are infrequent, but also because there could be a significant delay between the date the expenditure was incurred and the date of sale, and hence the need to disclose to H M Revenue & Customs (HMRC).
What should be kept?
The basic rule is that you should keep any information used to calculate any capital gain or to claim a capital loss. That information will include acquisition costs, enhancement costs and sale costs. The exact information required will depend on the type of asset sold, when it was acquired, how it was acquired, whether a valuation was used and how it was sold.
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On acquisition documents to retain will include acquisition details, including legal costs, stamp duty, valuation fees etc. If the asset was held before 31 March 1982 then evidence of the date of acquisition and a valuation at that date will be required. For listed shares it is not difficult to obtain the March 1982 value, but for private shares a formal valuation may be required. If the asset was not purchased but received as an inheritance, then a formal valuation as the date of the deceased’s death will be required. The solicitor dealing with probate should be able to supply this.
If expenditure was incurred improving the property and this is reflected in the value of the asset on sale, then these costs are usually allowed and the invoices should be retained. Maintenance costs such as decorating are not allowable.
Any sale agreement giving details of the sale proceeds will be required. Not all assets are sold however, as some may be gifted away, or lost or destroyed, or they may have become worthless. In any of these cases there is likely to be a capital disposal and evidence is needed to calculate the capital gain or loss. Where an asset is gifted away the sale proceeds may be the market value and evidence of this, which may be a formal valuation, should be kept. Where the asset is destroyed, or has become worthless, perhaps because the shares are in a company which has gone into administration, then evidence will be required. This could be correspondence relating to an insurance claim including details of any compensation received for a damaged asset, or a letter from the administrator demonstrating that the asset is worthless. HMRC publish lists of companies where they accept that the shares are of negligible value.
Where the individual has to incur costs in obtaining a formal valuation from a surveyor, then this cost will be allowable and the documentation should be retained. Any cost incurred establishing the value of the asset is likely to be allowed, and correspondence and invoices should be retained.
Best advice is if in doubt to keep all records relating to assets which will give rise to a capital gain or loss on sale. Once the disposal is disclosed on the tax return then the records need to be kept for a year after 31 January following the end of the tax year in which the sale was made. So if the sale is in 2011-12 and the tax return is filed by 31 January 2013, the records need to be kept until 31 January 2014. However, for sole traders or partners the records must be kept until 31 January 2018.
Finally, if the records are lost and the expenditure is claimed this must be disclosed to HMRC on the tax return. In this case the figures should be shown as estimated and that they should be accepted as the final figures. However, it is likely that HMRC will question them.
The main point is that it does not matter how legitimate the expenditure was, if HMRC decide to query it and it cannot be substantiated, they will deny it leading to an unnecessary tax charge.