After weeks and weeks of careful briefings to the press about the age of austerity, and how we were all going to have to do our bit, the end result wasn’t half as painful as we’d been led to expect.
That was all clever politics of course, softening us up, particularly over Capital Gains Tax, which had been the subject of many furrowed brows thanks to speculation that the tax would rocket from 18% to 40% overnight.
In the event the tax was only increased to 28%, and even then only for higher tax-rate payers.
However, while the tax threshold itself was only moved a little, HM Revenue & Customs has developed a sneaky new way to ramp up its takings from both Capital Gains Tax.
This week, one of the shadowy tactics employed the taxman to ensure it maximises its Capital Gains Tax receipts came to light.
Thanks to a freedom of information request from accountancy group UHY Hacker Young, we now know about how HMRC has been raking it in from its Capital Gains Tax enquiries. This is where the taxman challenges the accuracy of a tax return, and attempts to get more money out of the taxpayer.
Back in 2007/8, the taxman established a number of special teams focused on CGT compliance – in other words these teams make sure we are all paying the right amount of CGT. And boy, have they been busy!
And it’s property – or in other words, buy-to-let landlords – that the teams have clamped down on most during their special investigations.
Their work has included secretly trawling through Land Registry data to identify residential property sales by buy-to-let investors, and they have also been sneakily gathering enough evidence to challenge claims by some investors that a certain property has been their main residence, which would exclude it from CGT.
The moves have been very successful – over the past two years, the amount of revenue these enquiries have brought in have rocketed 23%, up to £73.6m in 2009/10. A figure that is all the more remarkable given that the amount of CGT which HMRC calculates is payable has more than halved over the last two years, falling from £5.3bn in 2007/8 to £2.5bn in 2009/10.
While Revenue & Customs is right to do this – tax evasion is not exactly a good thing for any of us – its shadowy tactics are somewhat unnerving, as is the fact that the success of these enquiries has only come to light thanks to the Freedom of Information Act.
Part of the problem with Capital Gains Tax is that it is a fairly complicated tax, with many loopholes or exemptions, that are open to abuse by the unscrupulous.
So if you want to pay as little Capital Gains Tax as possible, but without falling foul of Revenue & Customs, what should you be doing?
How CGT works
A good place to start is to look at how Capital Gains Tax works, and when you need to pay it. Any profit made on a property (unless it is your main residence – more on that later) is subject to 18% tax if you are a basic rate taxpayer, or 28% if you’re a higher rate taxpayer.
You will be required to pay the Capital Gains Tax by 31 January of the year following the year in which you sell the property.
Exemptions and loopholes
However, there are lots of exemptions and loopholes that are available on Capital Gains Tax for landlords, so buy-to-let is clearly an area that HM Revenue & Customs is targeting with its special enquiry teams.
Let’s take a look at how to successfully avoid a large tax bill – without coming under scrutiny for tax evasion.
You do not have to pay Capital Gains Tax if the property you sell is your main home.
However, the way the taxman views what constitutes your main home is somewhat idiosyncratic, which can be an advantage if you own more than one property. You only need to have lived in the property for a short time for it to be classed as having been your main residence, thereby entitling you to the relief.
In fact, as long as you’ve owned the property for less than two years, you can decide for yourself which property is your main home and nominate that property as such to HMRC. However, you have to do this within two years of changing the number of properties you live in, whether the change is an increase or a decrease. Note that your spouse must have the same ‘main home’ for tax purposes.
If you don’t nominate which property is your main home within two years of buying the second property, the tax office will make a decision "based on the facts", so potentially evidence like the electoral roll or the address your bank details are registered at. However, you could potenitally buy a third property and then nominate your main home as one of the other properties at that moment in time.
Even if you no longer live in the property, you can still qualify for the full amount of Private Residence Relief, provided that you sell it within three years of moving out or it no longer being your main home. The relief is given automatically, though you may need to show the amount of relief due on your Self-Assessment tax return.
If you’ve let out all or part of the property while you’ve owned it, you may not be entitled to Private Residence Relief, but you should instead be able to claim letting relief.
Working this one out can be pretty tricky – the maximum sum is £40,000 , though it will be reduced if you have made other gains on the property. Essentially, you are entitled to the lowest of these three figures: £40,000, the amount of Private Residence Relief due or the amount of gain you’ve made on the let part of the property.
This isn’t necessarily an easy estimation to make, so I’d advise having a read of the examples on the Revenue & Customs website which provide a decent guide.
Furnished holiday lettings
This is one area that the Government is currently consulting on, as we need to ensure our rules match up with those of the rest of the EU.
However, as it stands, if your rental property is classified as a holiday let, then you may be entitled to a further three Capital Gains Tax reliefs.
These are :
– Business Asset relief – all or part of your gain may be postponed if you buy another property or certain other assets for business use.
– Gifts Hold-Over relief – If you give away your property (say to a family member) all or part of your gain will be postponed until the property is sold.
– Entrepreneur’s Relief – Your gain may be reduced by four ninths for the first £1m of gains. (The new Government has proposed doubling this to the first £2m of gains).
– What’s clear is that while there are many potential reliefs involved with Capital Gains Tax, the Government is going to be casting a very keen eye over the veracity of your returns. Make certain you know exactly what you can and cannot claim – it may cost you a lot more in the long-run if you make a mess of it!
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