Homeowners may have cheated HM Revenue and Customs (HMRC) out of billions in tax relief by lying about whether the property they sold was their main home, claims a government financial watchdog.
The National Audit Office (NAO) wants HMRC to scrutinise claims for tax relief that surged by 13% to £117 billion over the past four years.
The largest slice is accounted for by homeowners claiming capital gains tax relief against their main home.
Principal Private Residence Relief (PPR) soared from £10.5 billion in 2012-13 to £18 billion in 2015-16 in line with rising house prices, said the NAO.
However, HMRC had not fully explained why a £1.7 billion increase was recorded last year and how tax inspectors confirmed that claims were justified.
In general, said the NAO, tracking tax reliefs was not systematic and fraudulent claims may be reducing tax bills.
“There are several restrictions and related reliefs which allow individuals to claim relief for two homes concurrently. This means more scrutiny may be needed to ensure people are following the rules correctly,” the NAO said.
“Reliefs reduce tax bills and may be exploited or used in ways which parliament did not intend.”
The NAO went on to explain that the amount of relief claimed could be due to rising numbers of buy to let landlords and complicated rules that determine how homeowners qualify for the relief.
HMRC hit back by maintaining that the amount of PPR had increased with the value of homes and because more homes were changing hands.
Checking the right tax is paid
“We ensure the right capital gains tax is paid by reviewing the data we hold and cross-checking with third-party information,” said a spokesman.
“We also carry out targeted campaigns where we use our own analysis to reach people we believe should have declared a gain but did not, and to raise awareness about the rules.”
Buy to let landlords cannot claim PPR on disposal of a rental home unless they lived in the property as their main home for some of the period of ownership. If they can claim PPR, they can also claim lettings relief, which is worth a minimum of £40,000 tax relief for each owner.
PPR is aimed at exempting homeowners from paying capital gains tax when they dispose of a property to move elsewhere.