Unpaid Tax on Rental Income

Big_Butts_2

Hi

My wife has been renting out her mothers house since her mum died in December 2009.

We receive £450.00 a month rental, so I would assume we would need to pay £90.00 a month tax.

We have not paid any tax as yet.

My question is - If we contact the Tax Office to pay the tax due over the past 2 years will we get a fine imposed for not paying the relevant tax in the relevant tax Year ? (based upon following taken from Direct.Gov)

1 day late A fixed penalty of £100. This applies even if you have no tax to pay or have paid the tax you owe.

3 months late £10 for each following day - up to a 90 day maximum £900. This is as well as the fixed penalty above.

6 months late £300 or 5% of the tax due, whichever is the higher. This is as well as the penalties above.

12 months late £300 or 5% of the tax due, whichever is the higher. In serious cases you may be asked to pay up to 100% of the tax due instead. These are as well as the penalties above.

KathysBoy

Couple of points :

1. You can offset any expenses incurred in the rental, e.g agents fees, insurance, maintenance costs etc.

2. The income from December 2009 until 5th April 2010 should have been declared by 31st October 2010 (paper copy) or 31st January 2011 (electronic). I guess this applies to whatever type of return you have submitted previously, so if you have only ever submitted paper copies then you can't use the online date (I don't know this for sure, this is just my assumption). So you are definitely overdue on this one and will have to pay the fine, unless you can prove extenuation circumstances as outlined on their website.

3. The income from 6th April 2010 to 5th April 2011 is due for submission on 31st October 2011 (paper copy) or 31st January 2012 (online) and is not yet overdue, so you need to get your skates on.

Big_Butts_2

Thanks for your quick reply.

Neither of us have ever filled out a tax form before, and neither of us knew we had to until recently - although now that we realize, we both understand that ignorance is not usually accepted as an excuse.

However, having read your comments and looking again on the Direct.gov.uk website I'm starting to think we may not have to pay any tax for the Tax Year 2009 - 2010.

Let me explain...

Tax Year 2009 - 2010

Property Rented from December 2009 @ £450.00 a month = £450.00 x 5 = £2250.00

You say we can deduct expenses / bills and a wear and tear allowance.

We did have some expenses, for repair work carried out in 2010.

1) The bathroom suite had to be replaced about 2 months into the tenancy because it was cracked and leaking, so this was an expense of £1701.00 for which we have the receipts.

2) We had the boiler repaired, and we still have the receipts for £153.50

3) We also pay a couple of bills monthly on the property.

Household Insurance £20.16
Phone Line Rental £18.98
£39.14 (£195.70 over 5 months)

So the total of all these comes to £1701.00 + £153.50 + £195.70 = £2050.20

So this gives us :

Rental Income £2250.00
Expenses £2050.20
Remaining £ 199.80

Then we come to wear and tear allowance...

Direct.gov.uk states this is 10% of the net monthly rent (net rent being the rent received less any costs you pay that a tenant would usually pay)

Well as we pay the Bills outlined above I assume this would be equal to £41.09 per month (this is 10% of £410.86, which is the net rent after the bills we pay)

So if we multiply the 'Wear & Tear' allowance by 5 months, this comes to £205.45, which is £5.65 more than the Remaining rental income from above.

Does that make sense ????

jimmo

Is this what you were looking at Directgov?
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/SelfAssessmentYourTaxReturn/Taxreturndeadlinescheckspenaltiesandappeals/DG_10014904
If so, you are jumping the gun quite a bit because those are penalties for missing the Tax return deadline. As HMRC have not yet issued any Returns, there is no deadline yet.
That doesn't mean you are not in trouble because other penalties might arise but it may be better to start from the beginning.
First, your wife inherited the property and she has been letting it. The income is hers, not yours.
Does she have any other taxable income such as earnings, savings interest etc?
Turning now to your second post, you seem to be on the right lines, but significant repairs in the first year of letting are quite likely to be challenged by HMRC, and, subject to your reply about your wife's other income, it could be better tax planning for your wife not to claim the costs of the new bathroom suite as a repair against letting income but to claim those costs as an improvement to the property when the property is sold and the question of Capital Gains Tax will arise.
Household insurance is a valid claim but, for non-tax reasons, this should be Landlord's insurance, not a standard domestic household policy.
Phone line rental is a bit of a strange one.
Why does your wife pay it?
Why don't the tenants pay it?
Who pays the call charges?

Big_Butts_2

Thanks again for the reply...

Yes that was where we got the information from.

You say we may be jumping the gun, as the penalties are for missing deadlines and the HMRC have not yet issued any Returns - not sure I understand this - do you mean the HMRC have not asked us to complete a tax return therefore we can not be fined for not completing one - I thought it was our responsibility to declare any changes in income that HMRC were not aware of - So as we have not declared anything for 2009-2010 we would be fined.

To answer your other questions:

I can understand your point about high cost repairs in the first year of rental, but we were unaware that the bathroom suite was knackered when we rented the house - I suppose the cost could be challenged - although we have a fully itemised bill, and the reason it is so high is that the builders had to spend 2 days hacking out the shower tray that had been stuck down with sealant and was leaking.

My wife works full time and earns around £25,000
We have joint savings of around £10,000

I agree the Insurance should be Landlord insurance, but my wife has never got round to changing the insurance....

As for the phone line - again another quirk of the rental - although I cant see Phone Line in the list of allowable deductable expenses.

The tenant pays the cost of the calls.

00ec25

Big_Butts wrote: »

- So as we have not declared anything for 2009-2010 we would be fined.

wife will be fined £100 if there is tax owed which has not been paid, if no tax is owed she will not be fined

Big_Butts wrote: »

I agree the Insurance should be Landlord insurance, but my wife has never got round to changing the insurance....

As for the phone line - again another quirk of the rental - although I cant see Phone Line in the list of allowable deductable expenses.

The tenant pays the cost of the calls.

your wife has a lot to learn and appears to have a very cavalier attitude

1. her insurance is null and void. If she does not have LL insurance then her current poilcy will not be honoured if there is a claim. For example if the property burns down she will get nothing...
if a roof tile slips and hits the tenant on the head, £10k in savings will soon go and your wife could end up being bankrupted by the compensation claim...
The LL insurance cost is an allowable tax deduction

2. is the boiler gas? Does your wife know it is a criminal offence (ie she could go to prison) if she does not have an annual LL's gas safety certificate? see here The cost is an allowable tax deduction and you do not exclude this from the wear and tear calculation as it is not a cost payable by a tenant

3. who pays the council tax? If wife does then that is a tax deductable expense buit must be excluuded from wear and tear as the tenant would normally pay it

4. the phone line rental is not listed because it would be a cost normally paid by the tenant, but wife can claim the cost as a deduction as she pays it in this case, however, it has to be excluded from the wear and tear calculation

Given the mistakes the wife has made she really ought to see an accountant and get her tax done for her , at least in this first year

somethingcorporate

Cowboy landlords like your wife give genuine ones a bad name. I hope they throw the book at you.

Absolutely no excuse for treating your tenants with such disregard.