HMRC seem to be in a “cracking down on things” mood at the moment. Recently we discovered they’d recovered nearly £8bn in business taxes above the previous year through tax inspections and subsequent enforcement. Now, it’s come to light that the same is happening with capital gains tax investigations.

Firm Collyer Bristow have revealed that HMRC collected £124m last year from investigations into SMES and wealthy individuals suspected of not being entirely straight or accurate with their reported capital gains.

Here’s our guide on what you need to know.

Capital gains tax investigations – why now?

You pay capital gains tax on certain things you sell for profit. Capital gains tax is paid by individuals, not by companies.

Examples of items you pay CGT on include personal possessions of £6,000 (more notes here on what they are), property that isn’t your main home (unless you’ve let it out, used it for business or it’s huge), shares that aren’t in an ISA or a PEP, and business assets.

You get a personal capital gains tax-free allowance every year of £11,300. If you’re a basic rate tax payer, you generally pay 10% (the rules can be quite complex so please get in touch if you need help). Everyone else pays 20% on their gains or 28% if the gain comes from residential property.

You may also be liable for CGT if you give an asset away as a gift, transfer it to someone else, swap it for something else, or you’re paid compensation for it (for example, an insurance payout).

If you sell your business, you normally only pay 10% of the price you sold it for (minus expenses) up to a lifetime limit of £10,000,000 (this is widely referred to as Entrepreneur’s CGT).

Capital gains tax investigations – why now?

Accounting firm PFP recently discovered and publicised the existence of two new investigative departments within HRMC, namely:

• the Individuals and Small Business Compliance Unit, and
• the Wealthy and Mid-Sized Business Compliance Unit.

Their successes so far have been hauling in an extra £3.4bn in VAT and £3.5bn in other business taxes in 2016/2017 over the amount in the previous financial year.

Capital gains tax investigations – rule changes

Rules enacted in 2015 have made it more difficult for businesspeople selling their company to claim Entrepreneur’s CGT.

According to Economic Voice, HMRC projects that only £2 billion of Entrepreneur’s Relief will be successfully claimed against Capital Gains Tax bills in 2016/17, down from £3.5 billion in each of the two previous years.

HMRC have long suspected that many people either avoid or reduce paying CGT and Entrepreneur’s CGT by creating artificial losses elsewhere. Speaking again to Economic Voice, Collyer Bristow partner James Badcock said, “in the past, CGT avoidance schemes have included creating artificial capital losses which can be used to offset the tax, whilst others might use offshore trusts and structures to make use of loopholes … However, some will simply fail to declare the sale or transfer of an asset, or undervalue it when reporting to HMRC”.

Professional Advisor reported on the case of a Hampshire landlord who was recently jailed for two years as he evaded £157,725 in capital gains tax after failing to declare the sale of properties.

Capital gains tax investigations – be careful out there

Remember that HMRC is the only part of the British state that presumes you’re guilty until you prove yourself innocent.

If you want to reduce your CGT liability, we will try very hard for you but it may not always be possible. Please be wary of schemes that appear very complicated and years later, these schemes come back to bite (and bankrupt) participants.

Speak with the team here at Burton Beavan and we’ll help you reduce all your taxes, including CGT, in a fair, transparent, and in a way that HMRC does not find objectionable. Please give us a call on 01606 333 900 and email us at hello@burtonbeavan.co.uk.