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Hmrc’S New Crackdown On Abuse Of Private Residence Exemption

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Have you used the Capital Gains Tax 'Principal Private Residence' (PPR) exemption on several properties in quick succession recently? HMRC’s crackdown on the perceived abuse of the PPR exemption could mean a knock at the door...

Should any Chancellor decide to abolish the Principal Private Residence (PPR) exemption he will save the Exchequer approximately £120 million per annum. Such actions may be difficult to implement despite being on the recently issued list of Tax Reliefs for review by the Office of Tax Simplification.

Even so, the Government needs all the money it can get and to this end the Chancellor has instructed the Local Compliance Investigation Teams of HM Revenue and Customs (HMRC) to take a tough line with those owners of second homes and ‘buy-to-let’ properties who try to follow the MPs' example and abuse the legitimate tax planning method of ‘flipping’' property that they maintain is their PPR.

As the article ‘Flipping Marvellous’ (October 2010 edition of Property Tax Insider) pointed out ‘flipping’ is a perfectly legitimate tax planning exercise. However, if used too many times or in quick succession, there is the danger that HMRC will initiate an investigation, in an attempt to prove that either the PPR exemption is invalid and that the real reason for nominating the properties is avoidance of tax, or the owner is really a ‘serial seller’ such that any profit on sale is to be taxed under Income Tax rather than CGT rules.

Designated Compliance Unit

It costs HMRC to launch an investigation, so they have to concentrate their efforts where they are most likely to see maximum return in terms of fines and penalties. Random cases chosen for investigation are therefore small; the vast majority are selected.

To assist in their task, HMRC has invested in a new computer system based at the IT department of the Valuation Office Agency in Worthing, West Sussex. Its primary responsibility is stated as being ‘specifying and testing both new and improvements to applications software for our three main business streams; Rating, Council Tax and property valuation for the Inland Revenue, [as was], other government departments and local authorities’ (Valuation Office Agency website).

This system brings together information formerly based in District Councils and enables the comparison of data collected such that, for example, an HMRC inspector can request a search to provide an historical list of all properties purchased by a landlord, or in some cases members of the landlord’s family.

This list can then be compared with declarations made on the CGT pages of personal tax returns. Properties sold within short timescales are therefore easily identifiable and tax return declarations easily checked. HMRC have had such success with their new system that they have formed a designated compliance unit tasked with targeting ‘tax evading’ property developers and ‘buy to let’ landlords.

Gathering Information from Other Sources

The new computer system is not the only database used. HMRC also compile lists using information gleaned from other sources, for example banks and building societies are required to provide details of accounts on which interest is paid over a certain amount. Such details may confirm the opening of a new bank account in which a large amount has been deposited. If this ties up with an entry on the Land Registry following the sale of a property, this could possibly mean that a chargeable gain should have been declared on a tax return.

Internet Reveals All!

In the current climate, HMRC knows exactly how many owners are trying to sell which investment properties to curtail their losses. Their primary source of information used to be local newspapers but this is being increasingly replaced by the Internet which produces quality information, not only of houses for sale or to rent but also of planning applications in relation to proposed house conversions which are then sold at a later date, producing a potential CGT liability.

The use of the website ‘Rightmove’ not only gives the sale/rent information but, most importantly, produces an estimate of the capital appreciation of a house since the last transaction. A check with the credit agency ‘Experian’ (again possible online) will show details of loans and mortgages of the taxpayer and people he is connected with, as well as identifying any linked addresses.

HMRC may also search the ‘Northgate Public Services Information System’ database which contains details of housing benefits paid to landlords by any UK local council. Councils are duty bound to place this information on the database and of course this is readily available to HMRC.

Moore v HMRC 2010

This case showed that at the start of an investigation the first check made by the HMRC is of Land Registry documents; the next step is to identify the landlord and ascertain whether or not he or she is filing tax returns and declaring the letting income. If the landlord is registered for Self Assessment but is not declaring the income then the intelligence gathering process starts in earnest.

An investigation may start by looking at another area of the tax return and lead to a potential CGT liability being discovered. For example, in what has become a popular source of income for some, SW19 residents let out their homes to players and officials in Wimbledon fortnight. Every year teams from HMRC attend the area, even knocking door-to-door, to ascertain whether homes have been rented out or are being used as unofficial boarding houses.

As well as checking to see that the rental income is declared on the Self Assessment tax return, the information so gleaned is kept on file until such time as the Land Registry or ‘Rightmove’ show that the house had been sold - the PPR claim may then have to be restricted.

http://www.taxationweb.co.uk/tax-articles/property-taxes/hmrcs-new-crackdown-on-abuse-of-private-residence-exemption.html

Don't you just love the bit about HMRC knocking on doors near Wimbledon? For an hour in the morning before they go to watch the tennis while they should be working?

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Don't you just love the bit about HMRC knocking on doors near Wimbledon? For an hour in the morning before they go to watch the tennis while they should be working?

I bet they don't even bother, how would they know? Are they cold calling?

The original article smells like a rehashed press release from the revenue publicity department.

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I doubt it's a coincidence that these sort of stories always tend to appear either towards the end of the tax year or in January; there was one in the Telegraph about late filing penalties going up to £1,300 (not really true).

With regards to the crackdown, it's fair enough for HMRC to challenge this area. If you are buying a house, doing it up then selling it on then you are trading and should be taxed as such; whether you lived there for a bit doesn't change that.

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Don't you just love the bit about HMRC knocking on doors near Wimbledon? For an hour in the morning before they go to watch the tennis while they should be working?

Am I correct to assume that our 'Honourable' Members of Parliament will be excluded from any new measures targeted at 'flipping' main and 2nd homes? :P

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With regards to the crackdown, it's fair enough for HMRC to challenge this area. If you are buying a house, doing it up then selling it on then you are trading and should be taxed as such; whether you lived there for a bit doesn't change that.

Indeed..

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Yawn another non story, HMRC have said they are going to crack down for the past 5 years.

HMRC have had massive redundancies lately, where do you think they will get the staff to investigate and enforce this rule?

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Yawn another non story, HMRC have said they are going to crack down for the past 5 years.

HMRC have had massive redundancies lately, where do you think they will get the staff to investigate and enforce this rule?

New Computers + New Data Sources + Geek = Solution

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New Computers + New Data Sources + Geek = Solution

You do know this is a government department don't you, they sacked any half decent in house IT years ago and are now relying on external companies. The record of a successful systems in budget and on time for the government is 0%, even for a system that works is asking a lot.

Edited by Ulfar

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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