Tax on rent

ekkygirl

Hi Im hoping someone might be able to answer a question for me.

My son bought a 3 bedroomed house to rent out about 5 years ago. He charges the same rent now as he did then (£500) as Housing Benefit pay it for the young family living there and it covers the mortgage with around £100 left over which he uses to replace things as they break. Cooker boiler leaky radiator etc.

He has since bought another house and lives there with his girlfriend and my two grandchildren.

He is not making any money but the house will increasing in value (hopefully one day). My worry is that he has never filled in a tax return for this house to declare the income, He says he has been advised that he doesn't need to as he doesnt make anything and that when he sells he may have CGT to pay. I find this strange as we are taxed at every opportuinity in this country and I think he will get a big bill one day the will bite him on the bum as there is no spare cash these days.

Does anyone know what the situation is?

Thanks in advance

trevormax

I think it depends on the type of mortgage he has (or basically what he is paying off on the mortgage with the rental income). If he is just paying the interest on the mortgage then this is ok to be deducted from the rental income. If he is actually paying part of the mortgage then I think this is not allowable and should be classed as profit (which means he should be paying tax on it)

Either way I think he should still be registered with HMRC and he may end up with some penalties and a tax bill. He can set up a meeting with an accountant or tax adviser (some of them do a free 30 min consultation to see if you need their services) to see exactly what his situation is. If he has made a mistake (and owes a bucket load of tax) the accountant mey be able to reduce that amount.

If he should be registered and he decides not to, ignoring all the penalties and the tax bill, it will cause more issues later down the road when he decides to sell the house if it sells for a profit.

kiwikaz

Your son needs to fill in a self assessment form every year regardless as to whether or not he makes a profit. Any loss is then carried over to the following tax year. Ultimately then he will pay CGT should he choose to sell the property. He should seek professional advice.
Also the mortgage company needs to be informed that the property is being rented out. There is usually a one off charge for doing this too.
Hope this helps a little bit.

Rolo_Tomasi

Its quite a common misconception that, if the rental income only covers the mortgage then there is no profit and therefore no tax due. Unfortunately only the interest element of any mortgage repayment is an allowable expense for tax purposes and therefore if the mortgage is a repayment type and there is still £100pm left over, then there is likely to be a profit (and therefore tax due) each year.

The tax due would either be at 20% or 40% of the rental income and if there is a liability there will also be interest and penalties added. The penalty can be up to 100% of the tax due however this level is only charged in extreme circumstances. I would advise that your son seeks professional representation as soon as possible as they will ensure that all expenses are claimed and negotiate with the Revenue on his behalf.

computerbar

In short he should have informed the HMRC of this EXTRA rental Income/Loss 4/5 years ago via self assessment.

whatever he does about the past year, at least he must enrol for online self assessment and declare this rental income for 2008/09 by 31st JAN 2010. and declare it for this year too after April 2010.

Typical Rental Income Calculations.
e.g. 12x500 = 6000
less ONLY interest element of mortgage = say £2800
Less Repairs = 1200
less Tear & wear allowance (6000@10%)= 600
Rental income for the year = £1400
If the property is on joint name then it should be split 50/50
this income of £1400 would also affect your son TAX Credits and other benefit too.

donquine

ekkygirl wrote: »

He says he has been advised that he doesn't need to as he doesnt make anything and that when he sells he may have CGT to pay. I find this strange as we are taxed at every opportuinity in this country and I think he will get a big bill one day the will bite him on the bum as there is no spare cash these days.

Does anyone know what the situation is?

He may be able to claim lettings relief and also his annual exemption. If the gain is relatively small, it may all be sheltered. So, no definite answer. There may or may not be CGT to pay when/if he sells.

jimmo wrote: »

I think the first thing your son needs to do is to make sure he understands how to correctly calculate his annual taxable profit or loss. As mentioned by other posters above the most common stumbling block for beginners is to assume that the mortgage repayments are allowable in full. It is only the interest that is allowable.
If he has actually made taxable profits he will be in trouble because he has not paid the tax due and will have to pay that together with interest and penalties.
If that is his situation then he seriously needs to consider whether he needs professional advice before he even approaches HMRC. A good accountant will really be able to minimise the damage if he can handle the initial contact with HMRC as well as any subsequent negotiations.
If your son has actually made losses each year then it is sensible to quantify the losses and advise HMRC because the losses can then be carried forward available to be set against any future profits from his letting business.
Assuming he is not already in Self Assessment that doesn‘t mean that he has to complete Tax Returns for the last 5 years.
He should simply write to his Tax Office giving his computations of the losses for each year and say that he wants the losses to be carried forward. That is known as a Free Standing Claim.
It would then probably be good practise to write to his Tax Office each year to give details of the loss for the tax year, the cumulative losses brought forward and the total to be carried forward
Your son could, as others have suggested, seek to get himself registered for Self Assessment so that he has to complete annual Tax Returns but, as long as he is making losses there is every danger that HMRC will automatically take him out of Self Assessment because his Returns are producing no tax.
Back to my original point. Your son really needs to understand whether he is making taxable profits or not. Once he knows that the way forward will become a little clearer.

The above is good advice. Assuming your son has been breaking even or making losses, there won't be any potentially lost revenue for HMRC. They could hit him with fixed penalties for not submitting his tax return, but any tax geared penalties would be a percentage of £nil.

If your son appoints an agent now, HMRC are more likely to accept your son was a bit daft but has now made a real effort to get his house in order (no pun intended). Whilst they don't condone people getting things wrong due to ignorance, HMRC tend to be a lot more sympathetic when it can be shown they have taken steps to sort things out going forward.

Best advice is for your son to accept he's made a mistake, to not panic, to dig out all his records and make an appointment with a good accountant in the New Year.

Alias_Omega

computerbar wrote: »

Typical Rental Income Calculations.
e.g. 12x500 = 6000
less ONLY interest element of mortgage = say £2800
Less Repairs = 1200
less Tear & wear allowance (6000@10%)= 600
Rental income for the year = £1400
If the property is on joint name then it should be split 50/50
this income of £1400 would also affect your son TAX Credits and other benefit too.

Plus,

Landlord Insurance
Travel to the property to inspect
Annual Gas Safety Checks

(Repairs / Maintenance - I would have the property painted every year, fences repaired etc, anything to reduce that profit, but to maintain the up-keep of the house)

Pennywise

donquine wrote: »

He will be able to claim lettings relief

Only if he actually lived in the house or is otherwise claiming principal private residence relief. Lettings relief isn't available otherwise.