Declaration of rental income

Troy_McLure

Hi,

I bought a property around 9 years ago with an ex-girlfriend. When we broke up about a year and a half later, I moved back in with the parents and rented the property out and have done ever since. However, the problem is . . . I have never declared any tax on the property.

It never really bothered me in the past as I was at home and the mortgage was actually in my parents names. However, having recently purchased a house with my current girlfriend I have this strange feeling that my luck will run out and wish to declare it. Especially seeing as I bizarrely recieved a letter from hmrc about a new tax code addressed to the said property?!

However, I am obviously worried about getting a massive fine of some description from the tax man which is stopping me from declaring anything. So should I come clean about the 8 years or so I've rented it or could I lie as I went on with a new letting agent in the spring and therefore could I say that I've been renting since then?

The income without allowing for mortgage repayments etc. is around £5k a year.

fengirl_2

No one on here is going to tell you it's ok to not declare taxable income and I think you know this.
I would advise you to go and see a tax accountant and give him/her as much info as you can about the lettings and let them contact HMRC on your behalf. There will be tax, interest and penalties to pay, but an advisor can negotiate on your behalf to reduce the liability as much as possible.
The mortgage interest won't be allowable if the mortgage is not in your name..... I think.

Rolo_Tomasi

I would advise that you contact the Revenue straight away and come clean with the FULL details - don't try to withhold any information as this could only cause more problems in the future.

The maximum penalty is 100% of the tax due however after deducting mortgage interest, agent fees, repairs, safety checks etc you may find there is very little (if any) 'profit'. If there is a profit it would be taxed at 10%, 20%, 22% or 40% depending on the tax year and your other income.

There is also a tax amnesty running at present. This is for people who have un-declared offshore income and the penalty is fixed at 10% of the tax not paid with no penalties if this tax is less than £1000. I assume that your property is in the UK however, when a similar scheme was run a couple of years ago the rules were extended to include onshore as well as offshore income. Not sure if it is the same this time around but would hope in the interest of equity it would be.

I would advise that you go to see a local accountant to ensure that you prepare accurate rental accounts and who can liase with the tax office on your behalf.

Troy_McLure

Yes the property is in the UK.

How big an issue is it if you don't have longer than a years worth of rental statements? I've never bothered keeping them for longer. This is likewise for receipts on work such as a new boiler I had fitted a while ago and a £4k refurb I gave it before the new tennants went in the Spring.

Also, this will make me sound an idiot, but when it comes to declaring the income and paying the tax, would it be deducted in one lump sum at the end of the financial year or would it go out monthly?

Thanks for the responses and further responses in advance.

Rolo_Tomasi

It will be your responsibility to declare the correct income so this will mean either obtaining copies of rental statements or checking the amounts paid into your bank account. If you have no evidence of expenditure the Revenue do not have to allow a deduction for it so even if you do not have a receipt you need to try to find some form of evidence of work done ie a cheque stub, credit card statement, etc. This is where an accountant will become invaluable as they will be able to negotiate with the Revenue on your behalf.

I think fengirl is correct about the mortgage interest so this could cause you a problem. Who has received the rental income? It seems a little odd that your parents have a mortgage secured on a property that they do not own and they do not receive the rental income from it.

With regards to paying tax, once you are up to date, and provided the tax is less than £2kpa you can have it collected by paying extra tax through your employed income. Alternatively you can pay the full amount which is due by 31st January following the end of the tax year.

Troy_McLure

The mortgage and property are in their name but I have previously received the income direct from the letting agent.

The reason it was tied to them in the first place was due to them putting down the deposit etc. and therefore looking to the future if me and the girlfriend were to split up then she couldn't try and claim half the property as technically we were renting it from them - if that makes sense?!

It's something that has just never been changed and I pay the equivalent of the mortgage to them through bank transfers.

Another question I would have would relate to capital gains. I.e. if I were to ever sell it, I take it I wouldn't be liable to it as I'm pretty sure I lived in the property for what must have been at least a year and a half before deciding to rent it out.

Pumpkinface_2

If the property is in your parents name, it is they who would be liable to capital gains tax should it be sold and it is whether they lived in it or not that is relevant for PR relief.

Rolo_Tomasi

Is your name on the deeds at all? If not then from what you have said it appears that it is your parents who should have been declaring the rental income - both from you and your ex girlfriend and then from future tenants. If this was the case then the mortgage interest would be an allowable deduction as the mortgage was taken out in order to fund a rented property. It is also your parents who would have to pay the CGT once the property is sold and unless they live in the property then no private residence relief would be available. I would just ensure that both parents are named on the deeds so that 2 lots of CGT annual exemption are available when the property is sold.

00ec25

Rolo_Tomasi wrote: »

Is your name on the deeds at all? If not then from what you have said it appears that it is your parents who should have been declaring the rental income - both from you and your ex girlfriend and then from future tenants. If this was the case then the mortgage interest would be an allowable deduction as the mortgage was taken out in order to fund a rented property. It is also your parents who would have to pay the CGT once the property is sold and unless they live in the property then no private residence relief would be available. I would just ensure that both parents are named on the deeds so that 2 lots of CGT annual exemption are available when the property is sold.

Rolo is basically correct in all he says nonethelss strictly speaking the OP has in fact received the income into his bank account and as such should have paid income tax on it, it is a source of untaxed income for him.

the fact he then paid over a sum of money to his parents, which may or may not exactly match the "rental" income he has recived, is irrelevant for his purpose as you cannot net off that sort of an income stream with an expenditure stream, otherwise anyone earning rent from a propety they owned but living somewhere else where they paid rent to do so, could net those two transactions off - and you can't do that!

his parents will still need to declare the payment from their son as it is rent they have received for the property they own but let to their son. They can offset it against the mortgage cost and of course will only pay tax if the income received is > mortgage cost. They do need to plan for the CGT (and maybe IHT as well)

James_Trimby

Hi this sounds like a typical mudddled family arrangment that happens all the time! In hindsight I wouldnt have started where you are now but one has to deal with what one has got, ditto on the missed records.

You need to see an accountant to help you sort out accounts for the years covered and advice on who should be reporting this. (You or parents). Without worrying about the legal answers a practical view is that it should be possible to argue that there is an unwriten agreement that the property is held in trust for you which removes your parents from the problem. (BUT they will need to give you all the mortgage statements for interest purposes)

You will have to estimate your rental income and costs. and you will need to tell Revenue that you have estimated some of them. Re interest I would probably claim it as you have been paying the interest indirectly but would need to discuss in detail with you as to the arrangements in place etc...

Set it all out in letter format with a tax amount for each year you recieved rent and post off with an apology! I have done this for clients in the past and everything has been very simple fines havent materialised though a bit of interest did. I would say more likely to be harsher today as they are short of money!

IF you are investigated, which is unlikely, you should note that the Inland Revenue have a duty to ensure you pay the right tax NOT the largest amount of tax. (they sometimes needs to be reminded of this!) so even if you do not have receipts for older expenses they will know the sort of costs required to rent. (re new boiler this will be certified and labeled so the boilder itself is proof of a cost).

Re gains again if you can argue a trust postion with the property the gain will be yours and you will get some main Residence exemptions. With current property position I assume gain may not be high at present. So might be a good time to sell to avoid too much tax if the position is challanged.

IF your accountant advises this is the way to go I would get a solicitor to draw up a simple trust document setting out what your parents intended (can't be backdated but can refer to past) to get things sorted clearly for the future.

DONT do nothing Revenue are much more tuned in to BUY to LET than they used to be.