HMRC issues nudge letters to catch undeclared Capital Gains Tax

HMRC believe that many people fail to declare Capital Gains Tax (CGT) due on the disposal of residential properties. A disposal of a main residence is of course in principle exempt from CGT and no disclosure is generally required. However, sales or gifts of second homes or let properties may need to be declared and CGT paid.

In an attempt to close this tax gap HMRC will be issuing 14,000 ‘nudge’ letters to taxpayers it believes made a taxable residential property disposal in the 2018/19 tax year but didn’t declare it on their tax return. HMRC have identified taxpayers to write to who according to information they hold have disposed of a property which is not their main residence but have not declared any CGT in respect of the disposal.

The letter will ask recipients to consider their CGT position in respect of the disposal and if necessary amend their return to include CGT or use the Digital Disclosure Service to pay any CGT due. If they do not consider that any CGT is due then no further action is required. However, where taxpayers don’t respond HMRC may carry out further checks to ensure that the correct action has been taken.

Taxpayers receiving this letter should carefully consider their response as HMRC will undoubtedly look to charge penalties where a disclosure is required.

A similar campaign run by HMRC for the 2017/18 tax year reportedly yielded a 15% success rate. The number of letters sent out this year suggests that HMRC believes around 2,000 people have undeclared capital gains to disclose for 2018/19.

Taxpayers disposing of residential property also need to ensure that they do not fall foul of the new 30 day reporting rule for CGT which came into effect from 6 April 2020.

Individuals, trustees and personal representatives realising a taxable capital gain from the sale or gift of UK residential property now have to make a ‘residential property return’ and a payment on account of CGT within 30 days of the completion date of the disposal.

Unless plans are put in place to meet these requirements prior to the disposal it may be difficult to meet this deadline, particularly where the calculation of the capital gain is complex. Taxpayers who are within the self-assessment system have to report the capital gain on their annual tax return as well as completing the 30 day residential property return.

Disposals of foreign property are not caught by the new rules, nor are disposals by companies. A return is also not required where the capital gain is not taxable for example if it is fully covered by main residence relief but otherwise interest and penalties will be charged if the deadline is missed. The return will generally be made online but there is a paper alternative.

Although these changes will mainly affect those disposing of second homes or rental property, there are other disposals that will be caught. A sale of a farm for example may require the sale of the farmhouse to be reported but not the sale of the land.

Accountants, Solicitors, Estate Agents and Land Agents all need to be aware of these changes to help their clients avoid penalties.