Avoiding Common Capital Gains Tax Pitfalls

HMRC has uncovered that many taxpayers make simple mistakes on their tax returns when it comes to capital gains tax. These errors can lead to extra tax, interest, and penalties. Here are five common mistakes and how to avoid them.

1. Use the right annual exempt amount for the correct tax year. This is the amount of gains you can have tax-free. It’s £3,000 for 2024/25, down from £6,000 in 2023/24. Spouses and civil partners each have their amount, which is lost if not used in the relevant tax year.
2. Be aware of earlier payment and reporting deadlines for gains on UK residential property. UK residents must report the gain to HMRC and pay the tax due within 60 days of completion. This only applies if no tax is due, such as when selling your main residence. Other gains or losses in the year are finalised in the self-assessment tax return.
3. Apply the correct final period exemption for private residence relief. If a property has been your main residence, the gain relating to the final nine months is covered by this relief, even if you no longer live there. This increases to 36 months if you move into care. The exemption was 18 months before 6 April 2020. Make sure to use the right exemption period and only apply it once.
4. Claim lettings relief only when eligible. Since 6 April 2020, this relief only applies if you let out part of your home while living in another part as your main residence. It doesn’t apply if the whole house has been let out. The relief is equal to the lowest of private residence relief, £40,000, or the gain on the let part.
5. Remember that business asset disposal relief (formerly entrepreneurs’ relief) has a lifetime limit of £1 million, not an annual limit. The limit includes any entrepreneurs’ relief claimed before the name change.

By being aware of these common mistakes and taking steps to avoid them, taxpayers can ensure they pay the correct amount of capital gains tax and avoid unnecessary penalties and interest charges. It’s important to keep accurate records, seek professional advice if unsure, and stay up-to-date with any changes to the rules and regulations surrounding capital gains tax.

Capital gains tax can be a complex area, with various reliefs, exemptions, and deadlines to navigate. However, by taking a proactive approach and being diligent in your tax planning and reporting, you can minimise the risk of making costly errors and ensure that you are fully compliant with HMRC’s requirements.

If you do find that you have made a mistake on a previous tax return, it’s essential to take action as soon as possible to rectify the situation. This may involve submitting an amended tax return, paying any additional tax due, and seeking expert advice to help you resolve the issue and avoid any further complications.

Ultimately, the key to successfully managing your capital gains tax obligations is to stay informed, keep meticulous records, and seek guidance when needed. By following these principles and being aware of the common pitfalls highlighted by HMRC, you can navigate the complexities of capital gains tax with confidence and ensure that you are meeting your tax responsibilities in full.