HMRC Wins Appeal Over Capital Gains Tax Discrepancy
Due to an evident lack of knowledge ...
Posted by Helen Beaumont on 23/08/2023 @ 8:00AM
John and Janet Beesley, a married couple, have lost their appeal against a significant capital gains tax demand from HMRC. They were slapped with a total of £63,541 for the sale of a property they jointly owned ...
HMRC, noticing the Capital Gains Tax oversight in May 2018, alerted the couple and their tax agent!
The confusion arose due to the misunderstandings and inaccuracies of their tax agent surrounding capital gains tax (CGT). The saga started in 2017. The Beesleys submitted their self-assessment tax returns for 2015/16. However, they overlooked including any CGT returns.
"They based this decision on guidance from their tax agent!"
HMRC, noticing the oversight in May 2018, alerted the couple and their tax agent. They indicated that the Beesleys had not declared any capital gains or trading profits from a recent property sale. This prompted a response from the couple's accountant in October 2018, wherein he provided what he believed was the corrected CGT computation.
This computation detailed a sale price for the property at £395,037. The accountant subtracted the mortgage redemption value of £186,345 and a personal guarantee of £152,016. This deduction implied a tax of £607.95, calculated at a 10% rate on the remaining amount.
However, HMRC swiftly countered this. They clarified that deductions related to mortgage redemption and personal guarantees were not applicable for CGT purposes. The correct computations would only factor in the initial purchase price of £103,000, legal fees, and the stamp duty land tax (SDLT).
"After adjustments, each appellant was seen to have a net gain of £134,945!"
Due to this significant oversight, HMRC not only raised the relevant assessments, but also levied penalties on the Beesleys. The inaccuracy in the initial declaration was seen as deliberate.
The Beesleys' agent, in response, put forward a fresh computation, estimating gains of £17,264.40 per taxpayer. He justified this revision as a result of miscommunications and accused HMRC of fabricating the capital gain assessment.
When the matter reached the Tribunal, the Beesleys presented their side. They explained that their primary motivation to sell the property was to alleviate the financial strain caused by their family business's liquidation in 2015. They further presented two claims related to money borrowed from the Bank of Ireland to mortgage the property and subsequent loans to the family business.
However, HMRC countered these arguments. They highlighted the lack of tangible evidence connecting the said loans to any qualifying criteria as per legislation. Moreover, there was no clear indication that the borrowed money was used for the Beesleys' trade or even that they were actively trading.
The law, specifically section 38 of the Taxation of Chargeable Gains Act 1992 (TCGA), is explicit about what qualifies for deductions in Capital Gains Tax. This section clearly enumerates that only the purchase price, the incidental purchase costs, sale costs, and any amount spent on property enhancements can be deducted.
In the tribunal's conclusion, the judges sided with HMRC. They agreed that the Beesleys and their agent had not provided adequate evidence of a qualifying loan. Furthermore, the payment timing did not align with the tax year in question.
The tax agent's evident lack of understanding of basic CGT principles was key factor in the judgement. I feel that the agent's assertion regarding the law's prohibitions was entirely misplaced. Section 38 TCGA was unequivocal about allowable deductions.
"Mortgage redemption was not among them!"
Given the evidence and arguments, the tribunal upheld HMRC's computations and assessments. The Beesleys' appeals were dismissed, cementing HMRC's position in the matter.
Until next time ...
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Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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