There was
controversy this week as an Olympic torch apparently sold on eBay for £153,100.
The seller, Sarah Milner Simonds, told BBC Breakfast "it's not me to keep
a shiny trophy on the mantelpiece when you can do something good with the
money". She says she is going to give the money to a community gardening
group. But she may end up with a very large tax bill as well.
Any Olympic
torchbearer who sells their torch may be liable for tax on the proceeds, even if they give the money to charity.
If the price fetched is more than £12,360 the torchbearer will have to pay Capital Gains Tax (CGT). If they give the money to charity through Gift Aid they may also have to pay some extra income tax depending on their own income and how much they give.
CAPITAL GAIN
Capital Gains Tax is due on the gain - which is the difference between the selling price and the cost of the item including any expenses of the sale.
The cost of the
Olympic torch is low to the torchbearer. Those who are sponsored by Coca Cola
or Samsung can simply keep the torch - the sponsors pay for them. Other
torchbearers who want their torch can buy it from the London 2012 organising
committee (LOCOG) on the day of their run for £215. Some will have paid
slightly less – £199 – if they bought the torch well in advance of the start of
the relay. There is an extra charge for a stand. The uniform is free.
(Incidentally,
the torches cost LOCOG £495 each which is almost £4 million for the 8000 that
were made.)
If the torch
is sold on eBay total fees are likely to be around £41.30. Some special
promotions can reduce that cost or increase it slightly. If the item is listed initially
as one from which the proceeds will all go to charity eBay will waive the fees.
But giving all the proceeds to charity may not be a good idea.
THE TAX
The torch counts as a ‘chattel’ – a personal possession. No Capital Gains Tax (CGT)
is due if the selling price is £6000 or less. If it is less than £15,000 then
the gain is limited to 5/3 of the selling price above £6000. So if the sale was
for £10,000 then the gain is (£10,000-£6000) x 5/3 = £6,667. On that amount no
CGT would normally be due as everyone gets a CGT allowance of £10,600 this
year. Effectively this means that a sale price of up to £12,360 is free of CGT because
the gain would count as (£12,360-£6000)x5/3=£10,600 under the chattels rule.
That is equal to the annual CGT allowance in 2012/13 and so no CGT would be
due.
If the selling price is more than £12,360 then some CGT would be due. The tax is levied at two rates
– 18% and 28% – on the excess above £10,600. The calculation is complex and
depends on the individual’s taxable income.
If they pay
higher rate tax on their income in 2012/13 then the whole of the gain above
£10,600 is taxed at 28%. If their income is lower than that then the gain above
£10,600 is put on top of their taxable income after the tax-free personal
allowance has been deducted. The chunk between their income and the level of higher rate tax is taxed at 18%. The balance above that is taxed at 28%. On a gain of
£100,000 the tax would be at least £21,595 if the individual had no other
income and up to £25,032 if they did.
All these
calculations assume the person has no other capital gains in the year.
Capital
Gains Tax is collected through self-assessment. The individual has a duty to
notify HMRC of a gain in this current tax year 2012/13 by 5 October 2013. HMRC
would then send out a self-assessment form for 2012/13. The individual would
need to fill the return it online by 31 January 2014, though that date can be
extended if HMRC did not notify the need to fill one in until after 31 October
2013. Deadlines for paper forms are earlier.
CHARITY
Even if the
proceeds of selling the torch are given to charity CGT will still have to be
paid. Gift Aid has the effect of reducing the rate of CGT so all the gain is taxed at 18% rather than some of it at 28%. But it does not wipe out the CGT
liability.
For example,
someone with a gross taxable income of £30,000 who sold a torch for a net
profit of £50,000 would normally pay £9784.50 in CGT. If they gave the proceeds
of the sale to charity the CGT would be reduced to £7092. They could pay that
by giving just £42,908 to the charity. The CGT charge would be the same which
they could meet with the £7092 withheld from the proceeds. The charity will
claim Gift Aid relief from HMRC so will get another £10,727 making a total of
£53,635.
However, the
Gift Aid relief can lead to an extra charge of income tax. A Gift Aid donor has
to have paid at least as much tax as the relief claimed by the charity. The tax
paid can be a combination of income tax and capital gains tax in the tax year
the gift is made in. If the donor has not paid sufficient tax they must
reimburse HMRC for the gift aid relief in excess of the tax they have paid.
So in some circumstances
where income is low and the gift is large there could be extra tax to pay.
In the
example above if the individual’s income was £20,000 rather than £30,000 and
they retain £7092 to pay the CGT and make a gift of £42,908 the total tax they
have paid is £7902 CGT and a further £2379 on their income of £20,000. That
total is £9471. But the charity would reclaim £10,727 gift aid relief on the £42,908 donation and the £1256
difference between the two (£10,727 - £9471 = £1256) has to be paid in extra income
tax. The charge could be avoided if the individual gave the charity £37,844.
That would leave the proceeds of the torch as follows: to charity £37,884. To
CGT £7092. And to self £5024. The charity then claims £9471 gift aid
relief which is exactly the amount of tax the individual has paid. In total the charity gets £47,355.
CONCLUSION
Anyone who
has sold a torch for more than £12,360 should see a qualified tax advisor or
accountant whether or not they want to give some or all the proceeds of the
torch to charity.
Anyone who
is wondering if they would ever be caught should remember that HMRC is already chasing more than 30,000 online
sellers to get their tax sorted out and it monitors eBay and other online
selling sites. It would be very easy for HMRC to identify everyone who sold an
Olympic torch on eBay. And HMRC knows they were acquired for next to nothing.
Anyone who
has not yet sold their torch but would like a charity to benefit can avoid all
these problems by giving the torch itself to a registered charity and let the
charity sell it. No CGT is then payable by the donor or the charity. Do not let
the charity try to claim Gift Aid relief (an extra 25%) on the amount realised
for the torch. That would involve the donor keeping ownership until the charity sold
it on their behalf. The donor then gives the proceeds. So back to paragraph one.
To qualify
for Gift Aid the organisation has to be a genuine charity. That is
- an organisation in England or Wales registered with the Charity Commission
- an organisation in Scotland registered with the Office of the Scottish Charity Regulator
- a Community Amateur Sports Club (CASC) registered with HMR
- an organisation in the EU or Iceland or Norway accepted by HMRC as a charity for Gift Aid donations
If the
organisation you want to give to is not a charity then Gift Aid is not
possible. The CGT would usually be more. But you would of course be free to
give the balance after tax to the organisation.
And what will
Sarah Milner Simonds have to pay in tax if she gets her £153,100? Depending on
her income and how much she gives to a registered charity her CGT bill will be between
£25,000 and £40,000 CGT and she may have to pay some extra income tax as well.
NOTES
My thanks to
the two accountants, the Chartered Institute of Taxation, and HMRC who all helped
me understand this arcane nonsense. Any errors are entirely mine. Do not rely
on this article to make financial decisions – always seek professional advice
from a qualified accountant or tax advisor first.