HMRC saying i did not declare profit from flat sale

chuggington

My first post and a bit long but will try and list all the facts to avoid too many questions later.

I purchased my first property when i was single aged 21 ( this was in 1988)
My then girlfriend moved in with me in 1993.
Had first child 1994. Sold this property in 1997 and purchased a building project. Joint mortgage obtained and my profit from first house used as deposit.
Moved into rented accomadation for near on 3 years while i rebuilt the house.
Second child was born 1999.
Me and wife seperated when house was finished. She moved to new property on her own and i moved in with parents then stayed with various friends family etc.
2002/03 thought it was time to get a place of my own so put a deposit on a new build live/work apartment.
I had started a company in 2001 which was a combination of retail and online. Was going to run the online side of things from the apartment when it was ready.
Apartment took longer than anticipated to be finished and was not ready until 04. When i come to obtain a mortgage was having difficulty because i was not on the electoral roll anywhere, so put myself on the elctorall roll of the house i rebuilt where my ex wife was living with my two kids. I had put down approx 10k on this apartment and did not want to lose it.
When it was finally ready and was about to move in me and wife reconciled and i never actually got chance to move in.
Was going to rent the apartment out but found there was a clause stating could not let it for 2 years.
The apartment was put on the market and realized a profit after two years since i reserved off plan.
I then lived in the house i rebuilt with my wife and two kids for the next 4 years.
In 2007 i purchased a home in Spain.
Early 2008 we seperate again and i moved to Spain where i live and work and have been here ever since.
My ex has a received a letter from HMRC addressed to me basically saying i should have paid CGT on the sale of the property.
How do i prove now at this stage that the purchase was going to be my main residence?
I did not declare it on my self assesment form because it was my main residence as wife and kids were living at the rebuilt house address on their own.
I registered on the electoral roll April 04, mortgage obtained May 04 and sale of apartment was Sept 04.
There would have been a number of ways at the time for me to reduce the CGT to next to 0 but i thought i was doing things correctly as this was going to be my main residence.
I know it is now going to be a uphill battle to prove all this. If the worse come to the worse and they insist on payment of the CGT what can i do to reduce the bill. I know i can submit the purchase and sale costs ie solicitors fees and estate agent fees but can i claim back the interest i paid for the 4 months the mortgage was running (about 2k)
I did not not use any of my allowance that year which is about 8k so i know i can use that, but can i use my wifes allowance if they are saying we was a couple and this was asecond home.
Another thing i think i could have done at the time is put the purchase through the company and took the profit from the sale as a dividend and only paid 10% corporation tax on it.
I did not do any of these things though as in my eyes it was my principal residence.
Any suggestions?

noh

Did you ever live in the property in question?
If not then it never could be your PPR so any profit will be liable to CGT.

chuggington

No i never lived in it. A month or so after i completed on it i moved back in with my then wife.
If this is the case and i am liable for the CGT what can i do to reduce the CGT bill?
Can i resubmit self assesments for me and my ex wife so we can claim are annual allowance of £8,200 each?
Besides the legal fees etc can you claim for mortgage interest? this equates to approx £2000 for the months i owned it.

olivetti

what name or names were registered with the land registry. If the company it does not have capital gains allowances. You and HMRC can only deal in facts not hypotheticals.

noh

Who owned it?
If only you you can claim your unused CGT allowance for the year in which the profit was realised.
If it was jointly owned then you and your wife can each claim your unused allowance against the relevant proportion of the profit.

Purchase and sale costs are allowable expenses.
Mortgage interest is not an allowable expense for CGT purposes.

chuggington

It was registered just in my name.
i know the company does not have capital gains allowances but if i had put the profit of the sale of the property through the company as it was going to be a place of work as well as a place to live then i could have claimed the profit in the form of a dividend and only paid 10% corporation tax on it.

Elaine_Wilson

chuggington wrote: »

It was registered just in my name.
i know the company does not have capital gains allowances but if i had put the profit of the sale of the property through the company as it was going to be a place of work as well as a place to live then i could have claimed the profit in the form of a dividend and only paid 10% corporation tax on it.

Corporation tax was 19% at the time.

Capital gains tax was at 20% or 40% dependent on your other earnings.

chuggington

Thanks elaine. You are right corporation tax was 19%.
Can you explain on my self assesment form it says minus 10% tax credits on dividends from UK companies (not repayable)
HMRC are billing me at 40%

Elaine_Wilson

My answer was a bit brief. Sorry.

This aspect of company taxation is often misunderstood and I suspect leads to wrong decisions being made.

The company makes a profit (which may include a capital gain) and this is subject to corporation tax. As you have already appreciated a company does not have the advantage of a separate annual exemption for gains. So £10,000 of profit becomes £8,100 after tax profit. Assume this is all paid out as a dividend. Retained profits are now nil.

Now switch to the rules for taxation of individuals. Forget the rest of the company's details, the only important thing here is that a dividend of £8,100 has been received. For income tax purposes this is treated as being received after a notional tax deduction of 10%. So the individual treats it as a gross dividend of £9,000 less tax of £900. This notional tax is not directly linked to the amount of tax paid by the company. No further basic rate tax is payable on the dividend but higher rate is collected. In this case it would amount to £2,025. This is 25% of the net dividend (or more correctly 32.5% of the gross minus the tax credit).

In your circumstances a gain of £10,000 will suffer CGT of 40% = £4,000.

Using the company, there will be corporation tax of £1,900 plus your own tax of £2,025 = £3,925.

chuggington

Ok so it now looks like i am going to be liable for about 10k CGT plus 3k interest and a penalty yet to be decided.
I am now looking for suggestions on ways i can reduce the liability as they have not taken into account any expenses and they have the purchase price wrong by 1k.
So i am starting to make a list and obtain copies of receipts for expenses incurred at time of purchase, would appreciate if someone could tell me if there is any other ways i could reduce the amount of the liability.
So far i have the following:
1k difference in purchase price
Solicitors fees
Estate agent fees
8.2k allowance for the year
Can i claim the 8.2k allowance for my wife as well as we were only living apart at the time?
What can i do to protect the house where ex is living now with my two children as its in joint names and has quite a bit of equity in it?

ps. The apartment was purchased just in my name if this makes a difference,but was married at the time and owned a property jointly with my wife, so was classed as a married couple.
I do not really want any trouble for them. They can do what they want to me.
I have no savings or investments i could use to pay the outstanding bill, so would they accept a payment plan or do they go straight for the house?

noh

Can i claim the 8.2k allowance for my wife as well as we were only living apart at the time

No because, as you have already stated, she was not a joint owner of the property.