Extra Tax When Accumulated Income Was Never Recorded

How this is worked out

Why your cost base is too low

Income that a holding earns and pays out to you is taxed once, when you receive it. Income that a holding earns and keeps is taxed too, in the year it arises, even though nothing reaches you. Adding that income to what the holding cost is what stops it being taxed a second time when you sell.

If it was never added, you do not have a missing receipt. You have an understated cost and therefore an overstated gain, and the overstatement is the whole of the income you were already taxed on. That is the failure this page prices, and it is a failure of record-keeping rather than of arithmetic, which is why the surfaces that explain the arithmetic are no use: they start from records you do not have.

Why the usual answer is right once and wrong twice

The answer you will be given almost everywhere is the rate on everything you failed to record. It is what the arithmetic produces while both gains are comfortably above the amount you may realise tax-free. Adding the missing income to the cost pushes the gain down, and once the corrected gain falls inside that amount — or below zero — nothing further can be taxed. The extra tax stops rising. The general rule does not.

These are the calculation model's own canonical figures, at its own canonical holding: bought for 30,000, accumulating 900 a year, against an allowance of 3,000 and a rate of 20%. They are a worked example of the mechanism and not a suggestion about anybody's numbers.

The arithmetic

Eight numbers you supply, and nothing derived from anywhere else. The tax is computed twice, once on the gain your records state and once on the gain as it actually is, and the answer is the difference. One expression covers all three cases rather than each being special-cased, which is why the boundaries fall out correctly instead of having to be found.

omitted(y)        = yearly income x y

gain as recorded  = proceeds - cost
gain corrected(y) = proceeds - cost - omitted(y)

tax(g)            = rate x max(0, g - exempt amount)

extra tax(y)      = tax(gain as recorded) - tax(gain corrected(y))
                  = min( tax(gain as recorded), rate x omitted(y) )

starts to matter  = the first whole year at which extra tax passes your threshold

The second line of the extra-tax expression is the finding. It is a minimum of two things: the rate on everything unrecorded, which is what the general rule gives, and a ceiling equal to the whole tax that was payable on the gain your records state. The records cannot save more tax than was payable without them, and where the ceiling is the smaller of the two, every further year of unrecorded income costs nothing at all.

After how many years does it matter

The second half of the question is not about the answer's size but about when it becomes worth doing anything about, and it needs a threshold only you can set. The year reported is the first whole year at which the extra tax passes it.

That year is a fact about the arrangement rather than about you, and it does not move with how long you have held. A holder who bought this year gets the same answer as one who has held for twenty, which is deliberate: the reader at year zero is the only one who can act on it by keeping the records rather than reconstructing them.

Why there is no growth rate

The field this page most obviously lacks is a rate at which the holding grows, so that a future disposal value could be projected. It is refused twice over. It would publish an expected return, which no authority publishes and this site does not invent. And it would answer the wrong question: what makes the missing records matter is the income that accumulated, not the price that moved, so the years are swept against a fixed disposal in order to move one variable at a time.

What this does not model

• an income figure that varies from year to year rather than being level
• units bought part-way through a distribution period, and the adjustment that follows
• any rate of growth, projected value or expected return
• a loss carried back or forward, and any relief on one
• part disposals, averaging across separate holdings, indexation and rebasing
• any other disposal, any other income, and anything else in your position
• any country, tax, scheme, wrapper, fund, allowance or published rate
• anything you may do after the disposal
• whether to sell at all

The limits of the calculation

• Every figure is yours. This page publishes no cost, no proceeds, no allowance and no rate, and there is no field that could carry one. That is not caution: it is what makes one surface correct wherever this mechanism exists rather than correct in one country.
• The yearly income figure is a reconstruction and the answer is exactly as good as it is. It is taken as level across every year held, which no real fund’s distributions are — a fund that paid little early and a great deal later has the same total and a different year-by-year shape. Calculate twice, once at each end of what you think it might have been.
• Units bought part-way through a distribution period carry an adjustment this page does not model, and no free surface found by the research behind this Asset models it either. Where that applies to a meaningful part of your holding, the figure here is an approximation.
• This is one disposal in isolation. Other disposals, other income, losses carried from another year, part disposals and averaging across separate holdings of the same thing are all absent, and each of them can change what is actually owed.
• A corrected gain below zero is reported as a gain below zero and the tax on it is zero. What may be done with that loss is a different decision and this page has no view on it.
• Nothing here says whether to sell, what to file, or what to do about records you do not have. Where the amount matters, the figure to act on is one a person who can see your actual records has produced.

A small amount that happens every year and is invisible in any single one is the subject ofa separate explainer on what a recurring deduction does over time. That explainer is about a charge that leaves the holding and this page is about income that stayed in it; what they share is the annual quantity nobody looks at until it is a decade deep.