Unpaid Tax - Rental Property Help

Lasttoknow

Hello.

I am new to this forum and have came here for some help and advice. I hope this is the right page to post on? I put it on the Rentals page too?? Sorry if I'm not allowed to do that? Maybe someone will tell me which is the right page??

I am a busy working mum of 2 kids who has a rental property in my name. The house is in my name as I only earn £9k pa.

The house was first rented out in December 2008, and vacated by the tenant in November 2009. The tenant missed a couple of payments and didn't leave the house in a very good state so we had to spend over £1k bringing it up to a rentable state again (naievely didn't take a deposit...but you live a learn!).

I left the tax issue up to my husband as I believed he was the best person for the job. Anyway, to cut a long story short, it turns out he hasn't paid any tax yet. He says there is guys at his work who have been renting for years without paying a penny!! OMG!!! How can this happen???

Since finding this out, I have tried to muddle my way through the landlord process...I have registered with my local council...got a gas certificate and got an energy certificate. I am too scared about the tax issue though.

What will happen to me?? How do I go about telling the tax deptartment that basically my husband has tried to dodge paying tax? That's the long and the short of it! How do I work out the tax?? He admitted he doesn't have a clue...

I have a new tenant now, and I contacted the tax department myself and told them about the new one....they moved in in February this year so I'm still ok with paying tax for this tax year I believe?? I think it'll be from February to April? They sent me out a letter with a reference on it for paying my tax but what do I do about the Dec 2008 - Dec 2009?? I haven't logged on to the HMRC site yet...I just keep looking at the letter and thinking omg what do I do!

Am I going to get into trouble for getting all my certificates retrospect?? I don't even know if we have the proper landlords insurance?? I looked at the policy and it is just a normal buildings insurance, with a note saying there are tenants in the property but it doesn't say it's Landlord Insurance??

Thanks everyone x

BLT_2

I'm not an expert but I googled the question. In essence if its in your name and you earn over circa 6500 a year (tax allowance) you pay the standard rate of 20% on the rent you receive - after you have deducted a wear and tear allowance from the rent and the cost of replacing any items.

Net result is that if you rent the property out for 1000 a month, then your tax for the year should be no more than 2400 pounds.

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_10013435

CLAPTON

you actually owns the property ?

how much rent did you collect in the tax year 2008-2009?

what expenses are there that can be offset against the rental income (mortgage interest, 10% ware and tear if furnished, insurance, gas certs, advertising etc)

chrismac1

Do not worry. There is not much tax to pay, if any. Based on your post, after the cost of mortgage interest, wear and tear, insurance, any utilities you've picked up and the repairs there may even be a taxable loss.

Action 1 - tell the HMRC about this source of income.

Action 2 - either learn how to fill in your tax return for the rentals, or hire someone to do this for you - £100 or so plus VAT would be the going rate.

There is no shame in this. I know folk who've not filed tax returns in 4 years and they are pretty brazen about this. You are doing the right thing.

jamesd

You're fine on the certificates unless a past tenant was to complain. Not likely and even then you've fixed the problem so you're probably fine.

If there's a mortgage you may well owe no tax, since interest on a mortgage up to the value the property was purchased for is deductible from rental income.

Penalties, if any, are based on the amount of unpaid tax and how helpful you've been, so telling HMRC on your own initiative would hugely reduce any penalties. You might well have no more to pay for the past years than tax owed plus 20%.

Lasttoknow

Thank you to everyone who has taken the time to reply! I REALLY appreciate it!

Oh this is turning out to be a minefield....I am so naieve!

Ok....here are the facts and hopefully some kind soul will point me in the right direction.

I bought the property for £92k and borrowed on the equity on our own house as I don't earn enough to qualify for a buy to let mortage. I have a beneficial mortgage from my employer...made up of the following....

£44k at 0.5% (this is the maximum amount I can borrow at base rate in relation to my salary, ie the staff element)
£85k @ 1.69%
Total mortgage £129k.

I receive a monthly rent of £525 for the property.

This mortgage is a benefit in kind, and I am paying tax on it. Unsure of the amount I am paying in tax for this benefit (:o yes, I know, I am useless!)....

The remaining £37k is borrowings for our own house (ie £129 - £92k = £37k).

My questions are as follows.....

1. Am I able to offset the amount I borrowed to buy the house against rental income as it isn't a buy to let mortgage??

2. Is it actually worth my while having a beneficial mortgage as I am getting taxed for having it....it's only £44k thats beneficial to me...the rest is on a public rate but I believe HMRC take the whole loan into consideration?? In effect, am I being taxed twice for this loan?? ie taxed as a beneficial loan, and taxed as a rental income?? Does that make sense??!

3. Can anyone give me a list as to what expenses I am able to claim against the tax...the property is unfurnished.

4. Can I offset the whole amount of £92k against any income? How do I apportion the interest rate with the 2 different rates?

Sorry for the length of this post....thanks guys x

chrismac1

You can't claim the interest against tax. You've paid cash for the property. If you are ever able to get a mortgage for the rental property, ONLY the interest element is claimable because the repayment part of a repayment mortgage is deemed to be a capital item.

For the beneficial loan, the current official HMRC rate is 4.0%. Your benefit in kind is calculated as the difference between this rate and the rate you are paying. In fact the 0.5% rate is exactly the same as the rate I am paying on my mortgage which is non-benefical as I am self-employed, but that state of affairs is due to the recession and won't persist. The one thing most first time lettors need to take care over is the pre-letting expenses, much of which will be claimable even though once they start the rental such expenses often are not claimable as they are covered under the 10% wear and tear allowance.

And all renters must take care over any expenditure which affects the fabric of the building. In many circumstances this is deemed to be capital. It's allowable against your CGT bill when you sell up, but not against income. Because of this, keep very good records - in 10 or 20 years time you'll be grateful you kept a good record of the spend on that small extension when the property was not being let, or whatever.

There are a lot of rules on what you can claim and what you can't claim, and many sites you can go to in order to find out, some self-employed people put this list on their own sites for you to read for free.

Pennywise

chrismac1 wrote: »

You can't claim the interest against tax. You've paid cash for the property.

Of course you can. What the loan is secured on is irrelevant. If you remortgaged your home to generate funds to buy the BTL, then the proportion of the BTL purchase price against total loan is allowable.

As for other matters generally, HMRC have produced an excellent "toolkit" for property rental taxation - well worth a look:-

http://www.hmrc.gov.uk/agents/toolkits/property-rental.pdf

chrismac1

Mmmm, what about PIM2105:

A taxpayer cannot, for example, deduct interest on a private loan, such as a loan used to buy their private residence.

I'd have thought it would be difficult to convince HMRC that this loan was "wholly and exclusively" business when it's been secured against the private main residence. Possibly there might be an argument if the borrower had made it clear to the lender that the purpose of the loan was to finance a buy to let, but the OP suggests strongly this was not the case. Hence how does the OP show that this loan was 100% wholly and exclsuively for the rental?

Lasttoknow

Thanks again for all your replies!

Chrismac1, I told my lender the additional borrowing was to buy another property, but they didn't seem concerned! Didn't question my borrowings in the slightest! I think they were just happy to get a sale.

Where have I strongly suggested that this was not the case?? I borrowed on the equity on our own property as I don't earn enough to qualify for a buy to let. I borrowed the money a few weeks before he sale went through, so it's obvious what I used the money for I think?? I don't mean to sound cheeky or anything, and I might be missing something so please anyone, tell me how the tax man will see it?? Again, I am quite naeive and green as this is my first experience and I supose everyone has to learn somewhere!

jamesd

chirsmac1, this is a business purchase, not a personal one. It's routine practice to borrow money secured on your own home (as an individual) and lend that to your BTL business (you lending the business money) to buy a property. The BTL business is allowed to deduct the interest cost from income, but can't deduct more than the actual rate paid. One reason why it's routine practice is that it's cheaper because interest rates on own-home mortgages are lower than on a BTL mortgage secured on the property that is being let.

Your mistake may have been thinking of a buy to let business as a private purchase. Or perhaps thinking about the security (occupied home) rather than the business asset (the BTL property) that the loan funds.

Even PIM2105 that you cited is very explicit about this in its second paragraph:

"For IT, interest payable on loans used to buy land or property which is used in the rental business, or on loans to fund repairs, improvements or alterations, is deductible in computing the profits or losses of the rental business in the same way as other expenses."

Most of the rest of PIM2105 covers such things as the way to split the interest into personal and non-personal use.

As BIM45690 says:

"When the business is funded using borrowed money and that money is used for business purposes the interest is allowable as a deduction in computing the business profits. The interest is not allowable as a deduction if the funds are being used for private purposes"

BIM45700 may also be of interest.

If in doubt, seek advice from an accountant experienced in dealing with BTL matters.