Is rent income covered by personal allowance?

geoffplus

My sister has been renting out the property left to her by our mother. It is a small rent income of £450 per month. Her only other income is a weekly pension of £60. She has never declared this income (rent plus pension) and the HRMC have contacted her for unpaid tax. Since her total income per annum is around £8520 (rent plus pension), less any deductibles for maintaining the property, is any of this income offset by her personal allowance? I know that the first £1000 of the rental income is one allowance she is allowed.  She could be facing a huge tax bill if not 

[Deleted User]

I presume you mean that the pension is £600 per month? Or are there two pensions, maybe a state pension. I can’t see how the income is £14000 otherwise.

She can deduct £1000 or the actual expenses if greater. If she uses the £1000 the taxable rental income would be £4400. If added to the pension of (presumably) £7200 the total of £11600 is below the personal allowance and no tax would be payable.

What exactly has HMRC sent to her?

geoffplus

Yes my mistake now edited. No her pension is sadly only £60 per week and my maths was wrong anyway. So she gets £3120 from the pension annually and £5400 from the rent - .so £8520 total. If personal allowance still applies (when she spoke to the HRMC they seemed to suggest it did not, hence my question)  then as you say she should be fine.     The HRMC have sent her a letter saying they need to know when she started renting the property, details of the rent that has been paid each year and of any expenses she has paid out. They also want to know her other sources of income This is because she has never completed a tax form from 2006 when she began renting the property and they have only just discovered this. She thought since her income was so small, she did not have to. They also want to know the earnings  of her partner during this time (she is not married). Not sure why this will make any difference as his earnings are equally meagre and have been intermittent over the period of the rental

[Deleted User]

While the income was below the personal allowance there would will be no tax to pay. However, on that income, this would not always have been the case - the personal allowance was only 4895 in 2005/06. Moreover there was no trading £1000 allowance until 2017. You do need to provide the information that has been requested.

Honestly, you need to engage professional help - this does look very much like a full enquiry to me.

Similarly what her partner earns is no business of HMRC. Is there another government department involved? Perhaps relating to benefits entitlement?

Jeremy535897

You say the rental income started in 2006 when the personal allowance was under £5,400. When did the pension start? Is it a state pension?

If her net rental income exceeds £2,500 a year, she is obliged to notify HMRC and complete a tax return. I am guessing her rental expenses are less than £2,900 a year so she should be completing one annually.

It would be very unusual for HMRC to go back more than four years or possibly six years, although they can go back 20 years in certain circumstances. This is not likely to be one of those.

The personal allowance in 2014/15 was £10,000, so her income would have been less than the personal allowance for at least the last six years. She could write back and makes the following points (assuming the facts are correct):

• as her gross income a year is fixed at £8,520 before any deductions, which is less than her personal allowance for at least the last six tax years, and probably for a lot longer, why do they need this information as no tax is at stake
• her partner's income has no bearing on her tax affairs, they own no assets jointly, and she is not in a position to answer any questions about it

Having said that, I would always recommend that someone faced with an investigation by HMRC employs proper professional advice from an expert in such matters.

[Deleted User]

Jeremy535897 said:

You say the rental income started in 2006 when the personal allowance was under £5,400. When did the pension start? Is it a state pension?

If her net rental income exceeds £2,500 a year, she is obliged to notify HMRC and complete a tax return. I am guessing her rental expenses are less than £2,900 a year so she should be completing one annually.

It would be very unusual for HMRC to go back more than four years or possibly six years, although they can go back 20 years in certain circumstances. This is not likely to be one of those.

The personal allowance in 2014/15 was £10,000, so her income would have been less than the personal allowance for at least the last six years. She could write back and makes the following points (assuming the facts are correct):

• as her gross income a year is fixed at £8,520 before any deductions, which is less than her personal allowance for at least the last six tax years, and probably for a lot longer, why do they need this information as no tax is at stake
• her partner's income has no bearing on her tax affairs, they own no assets jointly, and she is not in a position to answer any questions about it

Having said that, I would always recommend that someone faced with an investigation by HMRC employs proper professional advice from an expert in such matters.

I could be way off the mark here but the phrase ‘and they have only just discovered this’ did send off some alarm bells. Could some information have been received by HMRC anonymously with respect to the op’s sister and her partner? Just guesswork but not completely unlikely.

geoffplus

I think what may have triggered it is that the person renting the property has started his own gardening business. The HRMC did say that the deposit protection scheme had informed them - not sure why after all this time.

Neither of them are claiming or have claimed any benefits. Just the pension. They can dig, but there is no other income to find. I suspect they may think there is, because her annual income is so low.

Do you think she does need a professional - e.g. an accountant - to help? She was wrong not to post tax returns, but it does seem as if she will  owe them anything

Grumpy_chap

geoffplus said:

My sister has been renting out the property left to her by our mother.

You use the past tense.  Can I just check that this renting out the property is a continuing activity.  The property has not been sold, so this is not a CGT liability that is being queried.  Is that correct?

I assume that any IHT associated with your late mother's estate were all resolved at the time, so that cannot be what they are enquiring about.  Is that also correct?

If both the above are correct, then professional advice is required as Purdyoaten and Jeremy advise.  Given income is tight, a first port of call might well be CAB as they can sometimes provide good advice directly or they may be able to give information about any local charities that can provide Accountancy service on pro-bono basis.  Not sure what the eligibility for such services would be (if they exist), as the value of the property may disqualify your sister from accessing such services. 

If your sister can prove to HMRC what here total income was for each year since the property rental began (rent plus pension) and that total is below the personal allowance each year, then HMRC may take a lenient approach and be less interested in the rental expenses.  It all depends on how much of a jobsworth the case handler is.

[Deleted User]

geoffplus said:

I think what may have triggered it is that the person renting the property has started his own gardening business. The HRMC did say that the deposit protection scheme had informed them - not sure why after all this time.

Neither of them are claiming or have claimed any benefits. Just the pension. They can dig, but there is no other income to find. I suspect they may think there is, because her annual income is so low.

Do you think she does need a professional - e.g. an accountant - to help? She was wrong not to post tax returns, but it does seem as if she will  owe them anything

As Jeremy says - it depends how far they go back! On those figures, had the income been declared, tax would have been payable in the early years. An accountant with experience of tax investigations is much better placedthan your sister to mitigate any penalties that may arise. Still a little puzzled by the enquiry into her partner’s affairs though!

geoffplus

Grumpy_chap said:

geoffplus said:

My sister has been renting out the property left to her by our mother.

You use the past tense.  Can I just check that this renting out the property is a continuing activity.  The property has not been sold, so this is not a CGT liability that is being queried.  Is that correct?

I assume that any IHT associated with your late mother's estate were all resolved at the time, so that cannot be what they are enquiring about.  Is that also correct?

Yes still being rented, not sold. All IHT was paid. 

Jeremy535897

geoffplus said:

I think what may have triggered it is that the person renting the property has started his own gardening business. The HRMC did say that the deposit protection scheme had informed them - not sure why after all this time.

Neither of them are claiming or have claimed any benefits. Just the pension. They can dig, but there is no other income to find. I suspect they may think there is, because her annual income is so low.

Do you think she does need a professional - e.g. an accountant - to help? She was wrong not to post tax returns, but it does seem as if she will  owe them anything

It's all speculation. HMRC may have asked the gardener who he is renting from if he started to claim some rent against his tax, and HMRC would then have sought confirmation from the deposit protection scheme. It doesn't really matter. It is her decision as to whether to use a specialist accountant, but there may be ways of approaching it that would be far better than my simple suggestion.