Taxpayers who have chargeable gains falling within their AEA (£12,300 for 2020/21) do not have to pay any CGT and generally are not required to register to file a Self Assessment tax return if they do not already file one. This means that unrepresented taxpayers who make a chargeable disposal without realising it – most often on the disposal of a property which has at some point been the taxpayer’s only or main residence – are protected from falling foul of compliance obligations where the amount of the chargeable gain is small.
While the OTS report does not recommend that the Government should reduce the AEA without first considering what its purpose should be – LITRG is concerned that any reduction will bring more unrepresented taxpayers into scope of the CGT regime. HMRC data, for example, suggests that a reduction of the AEA to £2,000 would bring more than 250,000 taxpayers into the Self Assessment regime.
Victoria Todd, Head of LITRG, said:
“The OTS say that if the AEA is to be reduced, other exemptions should be reviewed – but it does not consider the case where an individual disposes of a property which has not been their only or main residence throughout the entire period of ownership. This is concerning, given that recent changes to private residence relief, such as the reduction of the final period of ownership which qualifies automatically for relief, relied on the fact that the AEA at its current level would give unrepresented taxpayers some protection from accidental non-reporting.
“We see that the rules on disposing of a property which might not have always been the taxpayer’s main home are not well understood among unrepresented taxpayers. In our experience, people often erroneously believe that if you sell a property which was at one point your home, then the disposal will be fully exempt. Making such a mistake might expose taxpayers to penalties and interest for failing to declare the disposal when they should have done.