HMRC sends out tax warning letters to property sellers

The aim of the letters is to remind people who might have made deductions in excess of the allowable proportion of 25 per cent of their residential finance costs when completing their self-assessment.

In particular, the letters will be sent to anyone who included a CGT disposal under the “other property, assets and gains” box in their voluntary disclosure. These disposals must be declared in the relevant part of the tax return and any residential property disposals requiring CGT payment must be paid by the financial year end.

Sellers who have made a financial gain from a sale that is not relieved by the Private Residence Relief must also declare this to HMRC. 

Profits from the sale of these properties need to be included on the CGT pages within the “residential properties (and carried interest)” boxes on self-assessment tax returns. Remembering that CGT rates are higher on residential property disposals than “other properties, assets and gains”, it is common for sellers to owe an extra 8% due to confusion over these two boxes.

Property owners are reminded they need to pay CGT if you make a profit from the sale of a property that’s not your main home, for example if you buy-to-let properties, own a business premises, land or inherited property.

Different rules apply if you sell your home, live overseas or are a company registered abroad, so you need to check if you are eligible to pay CGT.

The important thing to remember is that there is a different rate of CGT on property profits than other assets. If you are a higher or additional rate taxpayer, you pay 28 per cent on profits from residential property as opposed to 20 per cent on profits from other chargeable assets.

If you’re a basic rate taxpayer, the CGT rate depends on the size of your profit, your income and whether your gain is from residential property or other assets. In this case, you need to calculate your total taxable income, minus your personal allowance and other tax reliefs.

If your taxable income is within the basic income tax band, you will need to pay 10 per cent CGT on your profits (or 18 per cent on residential property). 

You do not pay CGT when you sell a property which has been your main home since you owned it. In order to qualify, you must not have rented out the property (having a lodger is allowed) or used your home exclusively for business (a home office is allowed).

Furthermore, the total size of the plot needs to be less than 5,000 square metres (just over an acre) and you can say that you did not buy the property simply to make a financial gain.

The period in question covers the 2019-20 tax year, but can apply to property transactions within the last four years. If you receive a letter, you only have a limited amount of time to check and amend your tax return using the digital disclosure service.

HMRC said it wants to help people better understand their CGT obligations and give them the opportunity to correct any errors they may have made on their 2019-20 self-assessment return by making an amendment to that return, before the deadline of 31 January 2022.

If you have made an error in your 2019-20 tax return, you will also be required to check the previous two years and inform HMRC. 

HMRC urges landlords who believe they have under calculated their tax to make a voluntary disclosure through the Let Property Campaign. They should also seek professional advice to correct any irregularities.