HMRC is sending out a new batch of nudge letters to sellers of residential properties to make sure that they have paid the right amount of capital gains tax. The tax authority believes that some may owe another 8% on top of what they have already paid, according to Dawn Register, Head of Tax Dispute Resolution at BDO.
The letters are asking individuals who have already paid Capital Gains Tax (CGT) and who sold a residential property to check that they paid tax at the correct rate.
“This is yet another example of HMRC using land registry data to check up on taxpayers reporting and paying tax on property deals,” said Dawn Register, Head of Tax Dispute Resolution at BDO.
HMRC continues to encourage landlords with tax irregularities to make a voluntary disclosure using the Let Property Campaign and seek specialist advice where necessary about the disclosure process.
Which freelancers and contractors could be affected by CGT?
“If you have sold a property in the last four years, HMRC will know and will chase up to make sure you have paid the right amount of tax. So if you’re not 100% sure you got the tax right, it is always sensible and cheaper to get it checked by an expert before HMRC come calling,” said Register.
Contractors that sold a buy-to-let or other investment property before April 2020 would have had to report and pay the capital gains tax due through their end of year tax return – due by 31 January 2021. But after the pandemic hit, HMRC is concerned that some taxpayers will not have completed the return correctly and could still owe tax. The thing is, HMRC can look back 4 years to challenge tax returns.
How much is CGT?
CGT on residential properties is charged at 18%. That is until the individual’s basic rate tax band for that year is exceeded and then 28%. However, gains on other assets (shares etc.) are only taxed at 10% (until the individual’s basic rate tax band for that year is exceeded) and then 20%. So if you didn’t tick the right box for residential property disposal it is quite possible you have underpaid tax by 8%.
Since April 2020, gains on property transactions must be reported on a special return within 60 days (30 days before 27 October 2021) so errors in the tax rate used are less likely – provided you knew you had to submit a special tax return in the first place.
HMRC also uses Land Registry records to check up that the 3% additional SDLT payable on second homes (including buy-to-lets and holiday homes) has been paid on a house purchase. This could impact those contractors that sold second properties at the onset of the pandemic and IR35 in the private sector so that they could retire early.