Did you make a capital gain in 2022/23 which is going to be reported on your 2022/23 tax return?
If you are a higher rate taxpayer, you can reduce your tax bills by electing for any gift aid donations that you will be making in the current year (2023/24) to be treated as being made last year for tax purposes.
The carry back can give you a tax saving if your income tax rate for last year was higher than it is going to be this year, and can also apply to capital gains tax. For instance, if you made a capital gain last year and some or all of the tax is payable at the higher rate because of the level of your income, you can increase the amount chargeable at the basic rate (instead of the higher rate) by “carrying back” this year’s donations to last year, which will have the effect of increasing your basic rate band. This can reduce your capital gains tax bill by 12.5% of the amount carried back if you are a higher rate taxpayer. You can carry back regular donations or additional one-off payments.
There are timing rules that have to be met – the donations to be carried back have to be made before the tax return for the previous year is submitted, and before the deadline for its submission (31 January 2024 in the case of the 2022/23 return). Also the election to carry them back must be made on the tax return. Each donation is treated as being carried back separately, and an election cannot apply to only part of a gift.
Donations to charities qualify for gift aid relief as long as they do not exceed four times the amount of tax payable for the year concerned.
Example
Evan sold a property in 2022/23 which was not his main residence, making a capital gain of £40,000 after deducting the annual exemption. Evan’s taxable income for 2022/23 was £35,000. He regularly makes charitable donations qualifying for gift aid, and in both 2022/23 and 2023/24 he is intending to gift £2,000.
Tax calculation 2022/23 with no carry back
| Capital gain | 40,000 | ||
| Taxable at basic rate (18%) | |||
| Income | 35,000 | ||
| Basic rate band plus personal allowance and gross gift aid | 52,770 | ||
| Balance left for capital gain | 17,770 | @ 18% = | £3,198.60 |
| Balance taxable at higher rate (28%) | 22,230 | @ 28% = | £6,224.40 |
| Total tax payable | £9,423.00 |
Tax calculation 2022/23 with carry back of £2,500 (gross) from 2023/24
| Capital gain | 40,000 | ||
| Taxable at basic rate (18%) | |||
| Income | 35,000 | ||
| Basic rate band plus personal allowance and gross gift aid | 55,270 | ||
| Balance left for capital gain | 20,270 | @ 18% = | £3,648.60 |
| Balance taxable at higher rate (28%) | 19,730 | @ 28% = | £5,524.40 |
| Total tax payable | £9,173.00 |
This example shows that electing to carry back a £2,000 payment of gift aid from this year to last year gives Evan a saving of £250 in tax.
Author: Michelle Baldwin, Assistant Tax Manager, Plus Accounting
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Date Published: 20 July 2023