How do I use the Capital Gains Tax land and business toolkit?

HMRC produce a number of toolkits which highlight common errors found in self-assessment tax returns. As the name suggests, the Capital Gains Tax land and buildings toolkit highlights key errors commonly found by HMRC in relation to capital gains tax on land and buildings. The latest version of the toolkit relates to 2021/22 tax returns, to be submitted by 31 January 2023.

Key areas of risk

The toolkit highlights the following key areas of risk.

Record keeping — good record keeping is essential as poor records may mean that the information provided on the tax return is not accurate, and this may result in incorrect deductions for expenditure, with amounts over or under-stated. In addition, poor record keeping may mean that allowable expenses are overlooked and reliefs are not claimed. The nature of Capital Gains Tax means that past events (such as the incidental costs of acquisition) are relevant and records need to be kept until the property is disposed of so that any gain can be computed correctly.

Disposals – disposal are not limited to the sale of the land or building and a disposal will occur for capital gains tax purposes where a property or land is given away or exchanged, and this may trigger a capital gains tax liability. There may also be a disposal for capital gains tax purposes if an asset is lost or destroyed or if a capital sum is received in respect of the asset. All disposals should be taken into account in the return, and care should be taken to include the disposal in the correct tax year.

Valuations – the valuation of land and buildings comprises the largest single area of risk and accounts for a large part of HMRC compliance work. Problems are more likely to arise where the valuation is not performed by a qualified independent valuer. In valuing land or buildings, errors may arise where the potential for development, the existence of tenancies, the inclusion of intangibles or other assets or the existence of restrictive covenants over the land are overlooked. HMRC are less likely to challenge a valuation where they are happy that it has been undertake by a qualified independent valuer.

Expenditure – certain expenditure is allowed as a deduction in computing the chargeable gain, including acquisition costs, enhancement expenditure and the incidental costs of disposal. Expenditure is only allowed as a deduction if it is capital in nature and has not been deducted elsewhere (for example in calculating rental profit). Care must be taken that expenditure that is deducted in computing the gain meets these tests.

Reliefs – various reliefs are available for capital gains tax purposes (such as private residence relief). However, reliefs are only available if the associated conditions are met. Some reliefs require documentary evidence. Care should be taken to ensure that the conditions are met where reliefs are claimed.

Checklist

The toolkit also contains a useful checklist. This can be used as an aide-memoir and it is advisable that it is completed when completing the tax return to ensure nothing is overlooked. This may prove to be time well spent.

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Any questions?

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