Tuesday, 1 March 2011

Capital Gains Tax Delight

This posting will be interesting for anyone who encounters difficulties with the HM Revenue & Customs brought on by the fact that they have to move away from their home that they own for work in another area but given the slow housing market are not in a position to sell the property and buy in the new area, so are compelled to rent there.  Regular readers of this blog, may remember back to 2007-8 when I had such difficulties.  Back in 2001 living in East London I had bought a flat in Newham.  I was unable to find work in the area and was offered a job in Milton Keynes, a distance a way which proved too difficult to commute.  I rented a flat in Milton Keynes and rented out my flat in London.  The job was initially only a 2-year contract but I was fortunate to get a second 2-year contract with the same company, in a different post, so remained in Milton Keynes, continuing to rent out the property in London, though living there between one contract ending and the new one starting.  When this job finished I got a 2-year contract in Hampshire and again rented there, unable to afford to buy even a flat in this high cost area.  The contract was renewed but then I was made redundant.  In the meantime, in December 2006 I and the woman and boy I had been sharing a rented house with were told to leave as the landlord wanted the place back as he was separating from his wife.  In the next house we rented, the landlord defaulted on the mortgage and he harassed us only to move at his convenience, refusing to let us leave early and yet insisting when the time came he would want us out in 2 weeks.  Our unwilling to comply led him to keep phoning (50 times in one 24-hour period) and photographing us as well as demanding additional money.  His friends in the local police meant our complaints of harrassment were dismissed.

At this stage me and the woman were sick of renting property and realised that if I sold my London flat and combined our earnings we could buy a house to live in, even in southern England.  Due to the bullying of the landlord we had no time to waste and moved in December 2007, just at the peak of house prices, but we had no option.  The shock came when I sold my London flat.  The estate agents, David Daniels, were worse than useless setting up dubious deals which heavily under-valued the property.  While I was able to push the price a little higher, as a 2-bedroomed flat it was sold for the same price as a 1-bedroomed flat and the estate agents' staff managed to break the front door lock on the day contracts were supposed to be exchanged, leading to a dash to London to get someone to secure the flat and allow the sale.  The problems did not end there.  I had already been charged £16,500 by Newham Council, one of their periodic levies on private property that is in council-owned buildings.  I have subsequently been told that I should have contested that charge, but handling everything from 190 Km away and with the council insisting on payment and even refusing to give a receipt, I was in a weak position.

Then came an additional shock, that I was charged capital gains tax on the sale of the flat.  I detailed this back in November 2008: http://rooksmoor.blogspot.com/2008/11/property-in-uk-12-capital-gains-tax.html  Bascially I was told that because I had not been living in my flat consistently throughout the six years I had owned it, and had rented it out, then it had become a business and I was liable for capital gains tax once I sold it.  I was sent the wrong forms three times and was giving conflicting figures, but the final bill came in at £16,800 (now worth €19,990; US$26,700). I explained the circumstances at the time and how that the flat had not been bought as a 'buy-to-let' property but as a place to live.  However, finding work elsewhere had made it seem the best idea to rent the property out especially when in the mid-2000s councils started charging 50% council tax on empty furnished properties as mine would have been and this, of course, put pressure on to rent out the property.  The last 2.5 years worth of rent, which I had paid tax on was wiped out by Newham Council's charges, so it would have hardly been a profitable business.  I accept the value of the property had risen and I took it that that was effectively what I was being taxed on. I could see no alternative but to pay this bill.  By this time I had jointly bought a house and with the agreement of my co-owner, I got another advance on the mortgage (I had had one already to pay off Newham Council) and paid the bill.

That was how things stood, I paid each month to the mortgage which had been taken out to cover the tax and imagined it would be brought to an end now that the house we live in has had to be sold, as long as we could get a price higher than what we owed on it.  However, with all the furore in 2009 over the exaggerated expense claims of MPs, there was discussion of them 'flipping' between their so-called first and second homes so as to avoid paying capital gains tax when they sold the second home.  I did not really see a connection with my own situation and saw it simply as some kind of sophisticated business scam that these people pay accountants large sums of money to work out for them.  I thought it had no more relevance to me than an off-shore bank account in the Cayman Islands did.  Fortunately, my father pointed out the application to my own situation.  The reason why these MPs were making their second home appear as their first home was because that brought them exemption from capital gains tax.  Then he started asking, why had I been liable from capital gains tax when I had only ever had one property (I have only ever completely owned one property and part-owned another in my life and not at the same time). 

Following his guidance, back in September 2010, I wrote to the HM Revenue & Customs outlining the issue and pointing out that I had sold my only property, the flat and put all the money (and more) into the house I now lived in (and was trying to sell).  I told them that not only had I made this clear at the time, but surely with their powers they could tell what mortgages I had had and what property they had been raised on.  I did remember at the time when I was telephoned with the bill, this must have been March 2008, the woman from the tax office seemed surprised that I said I might have to sell the house I lived in, in order to raise the money.  At the time it had not been clear if the lender would extend my mortgage any further, me having already advanced it once, so reducing how much equity we had in the house.  She seemed to believe I owned a number of properties and could simply sell one of them.  I counter-acted her view, but that conversation never seemed to penetrate into my tax file and so the tax demand was made.  Part of the problem was the timing.  I sold the flat in December 2007 but by the time the bill was sent in April 2008, I was living in the house I had jointly bought.  It seems that the tax office had believed that I had owned the flat and the house simultaneously, which would have been impossible as I could only pay into the house by selling the flat.

After having explained my situation in September 2010, I heard nothing from the tax office until December when I received a very old-fashioned form which stated that using a law from 1970, I should state why I felt that I had over-paid my capital gains tax.  I wrote out the details that I have given here.  I pointed out that I had tried to make this clear at the time, but due to the confusion of wrong forms and people telling me different things, I guessed that the information had not got through correctly.  Staff at the tax office had made false assumptions and so charged me on that basis rather than the reality I was trying to tell them.  Anyway, I sent the form in, expecting that I would have a response that told me why I had been liable and rejecting my request for repayment of the tax.  As I have noted, cut-backs at HM Revenue & Customs mean they are pretty short-staffed already, one reason why it was taking months for them to produce a response.  See my posting: http://rooksmoor.blogspot.com/2010/11/collapse-of-british-tax-system.html for other issues that I and many other people have encountered as a result.

To my shock, last week, I went to my bank account and found the entire sum of the capital gains tax I had been charged in 2008, had been refunded.  As yet, I have received no letter from HM Revenue & Customs saying that I was getting the money back or explaining what actually happened back in 2008 for such a large error to occur.  Given the fact that late last year I was sent two different tax codes on the same day and was told I should inform the employer who had made me redundant five months earlier, I guess that there is chaos in the tax offices and I should not be surprised that errors creapt in.  I guess I was simply labelled 'serial landlord, selling off one of his many buy-to-let properties' rather than 'man finding work wherever he can in the country selling his home in order to buy another one'.  Basically if you own just one house or flat, even if because of circumstances you cannot live there for long periods and rent it out, it is not going to be liable for capital gains tax, especially if you use the money from the sale to buy your next 'dwelling house', or, I imagine, use it to pay nursing home fees.  Of course, as some people have pointed out, I am still out of pocket.  I have not received the interest that I could have earned if that money had been in an account or invested.  I will not get back the money that I have paid in interest to the building society for this addition to my mortgage.  However, at this time when I lacked the money even to put down a deposit to rent a 1-bedroomed flat, I am just grateful to have the funds returned to me.

The lesson seems to be, that we are going to face greater difficulties in having a consistent application of tax as HM Revenue & Customs crumbles even further with the cuts introduced by the Cameron regime.  This is most likely going to hit ordinary people trying to go about quite ordinary day-to-day stuff and in many cases, being compelled to move around the country for work.  With the property market so slow, it is very unlikely that you can quickly sell your home and buy a new property in the place where the work is and to do so, especially with the short-term contracts that are so common, can be a great cost in itself.  Of course, the business people with personal accountants will always be able to squirm their way out of most liability much as the MPs did for so long.  Thus, my recommendation is, if you end up in the circumstances that I did, to avoid being charged tax that you are not, in fact liable for, is to make a fuss.  Keep telephoning, keep writing to them until you are certain that they have not shoved you into some convenient box designating you as something based on easy assumptions rather than the truth.  The fear, has to be, as the civil service across all its branches is pressed and cut even more, many such errors will occur.  They will not make a huge difference to the national budget but they can hit very hard on ordinary people.

1 comment:

ColKillgore said...

I am glad to hear something has come up a little more positive for once.