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HMRC is rummaging through Land Registry data to identify taxpayers who have bought and sold properties, but failed to disclose disposals in tax returns.

As a result, accountants have seen a rise in Capital Gains Tax (CGT) enquiries focusing on residential properties, which can involve taxpayers having to pay extra bills running into thousands of pounds.

Apparently Capital Gains Tax enquiries focused on residential properties have become much more common recently and HMRC has clearly stated in enquiry correspondence that it has obtained information on taxpayers from the Land Registry, which is something we’ve not heard before.

Tax accountants are noticing a trend since the last budget for HMRC officials to re-examine popular tax dodges to recover some of the estimated £40bn lost each year through illegal tax evasion and aggressive, but legal, tax avoidance.

But it is important to keep in mind that HMRC needs to be reasonable in their approach as there can be a number of reasons for these types of discrepancies, for example, if the property is shared.

There is also a difficulty in interpreting improvements and this can have an effect on the amount of CGT paid.

In some enquiries HMRC has argued that taxpayers have incorrectly offset some costs spent improving properties against CGT.

Taxpayers are allowed to deduct the cost of work on a property from their CGT bill but such work must be considered “enhancement expenditure” and not maintenance.

The number of owners of second homes in England has risen by 30% in the past decade, according to the Council of Mortgage Lenders (CML), so how can home owners avoid this timely, and often expensive, mistake?

HMRC rules state that if you live in more than one property you must tell your Tax Office which one you want to be treated as your main home, or your principal private residence, (PPR) for CGT purposes. You have to reside in the property to nominate it as your main home.

You have to make the nomination within two years of changing the number of properties you live in. If you do not tell your Tax Office which property you wish to call your main home, the question of whether a home that you sell has been your main home and eligible for private residence relief has to be decided on the facts.

Therefore it makes sense for you to decide and notify the Tax Office before the two years are up.

You do not have to keep the same house as your main home. Once you have nominated a main home you can tell the Tax Office at any time that a different property should be the one that qualifies for private residence relief but you cannot backdate the change more than two years. This is known as “flipping”. However, care must be taken and you should consider getting professional advice.

Also, if you buy a house for someone else to live in and own it, but don’t live in it yourself, you will not be eligible for private residence relief when you come to sell the property. You are effectively making an investment in a property, so when it is sold at a “gain” (profit) you will be liable to pay CGT on that gain.

This is because HMRC could claim that taxpayers who regularly carry out this type of activity are in fact engaged in a trade (property development) and therefore liable to income tax and National Insurance.

Taxpayers, who buy, renovate and sell properties without letting them could be considered developers. Any gains would therefore be taxable as income. The difference between CGT and income tax at the moment would mean a massive increase in the amount of tax they would have to pay.”

When in doubt, KinsellaTax can assist. Call us on 0800 471 4546 if you have any concerns about capital gains tax

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