Failure to understand tax law costs property owner £25k capital gains tax

It can be tempting to take a relaxed attitude when it comes to tax and, if things go wrong, plan to plead ignorance. After all, how can you know all the tax rules? It’s easy to make a mistake or wrong judgement if you haven’t taken expert advice. And how can HMRC reasonably penalise a taxpayer for an error?

Well, they can impose penalties and they very often do, as the example below illustrates. It is typical of the situations some taxpayers find themselves in if they fail to declare all their assets and gains correctly.

Newfield vs HMRC

The origins of this particular case date back to 1997 when the taxpayer, Newfield, inherited a property from his mother.

In 2000, this taxpayer became bankrupt. Beneficial ownership of their inherited property fell under the guardianship of a partner at Grant Thornton UK LLP, who was acting as a trustee in bankruptcy. This is a way to retain an asset if you have been declared bankrupt and the legal ramifications are complex. They are also different to the way HMRC regards bankruptcy and beneficial vs legal ownership. More on this later.

In 2003, the taxpayer was discharged from bankruptcy and was able to re-acquire beneficial ownership of the property from the trustee in bankruptcy.

In 2016, the taxpayer sold the property for £215,000, but did not declare a gain on their tax return because they believed this was not required.

In 2019, the taxpayer was contacted by HMRC informing them that an enquiry had been opened into their tax affairs for suspected non-disclosure of capital gains tax due.

Understanding the difference between beneficial and legal ownership

This case hinged on the way property ownership is treated under UK law. When a taxpayer owns an asset, the ownership can be regarded as legal or beneficial. For tax purposes, if a property is held under beneficial ownership and is disposed of, this has capital gains tax consequences.

The taxpayer, Newfield, did not appreciate the distinction and assumed they were the same, so failed to declare a capital gain when disposing of the property in 2016. They believed that because the property did not increase in value between 2003, the time when beneficial ownership was reacquired following bankruptcy, and the final date of disposal there was no gain to declare.

However the law states that regardless of the ownership situation involving the bankruptcy, the taxpayer was the beneficial owner throughout the whole time period from 1997 through to 2016. This meant he should have paid out £26,305.50 in capital gains tax.

Always treat HMRC officers with respect

The taxpayer did try to lodge an appeal, however it was rejected. The circumstances around the rejection are also worth highlighting. In this case, the taxpayer was representing themselves and according to HMRC, had behaved in an unnecessarily aggressive manner. This didn’t bode well for them and as a result, the Tribunal panel showed no leniency.

This case highlights a number of important points. Firstly, although you may have a good understanding of general law, tax law may be very different. It is worth seeking independent advice and the cost of this is likely to be a lot less than any tax liabilities or penalties arising from a misunderstanding.

Secondly, if you are representing yourself, it can be difficult to remain cool headed and impartial. As this example showed, it was noted that the taxpayer was especially aggressive during correspondence and even though HMRC were found to have made a few minor errors during their construction of the case, this was disregarded by the judging panel due to poor behaviour by the taxpayer.

Ultimately, HMRC’s assessment and rationale for the outstanding capital gains tax was upheld and the appeal dismissed.

Tax advisors will save you money and time

It is always worth getting professional advice. A good tax advisor will save you money and ensure that you always stay on the right side of HMRC.

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