Unpaid income tax from deceased parent's rental properties

JohnRinson

Hi
My father died recently, owning a rental property. 

He had dementia, so during last year I gained power of attorney to manage his finances. 

When I did so, I realised his finances were completely disorganised. He kept no records and mainly operated in cash - and there was no record-keeping that I could find evidence of relating to his rental property and income from that. 

When I took over the finances, I got the rental property managed via an agent and began keeping records but he died soon after - and I believe he never declared this rental income to HMRC. 

The solicitors dealing with probate have advised me I should make a voluntary disclosure to HMRC to declare this income - and volunteer to pay the unpaid income tax out of the estate. 

I've begun the process of trying to do this via an accountant, but I have no records and can only really make an estimate of income based on what I knew from right at the end of his life about his income at the time. 

The issue I have with this is that I don't really **know** anything for certain - it's all guesswork, so I'm expected to tell HMRC what I think he might've owed, based on zero knowledge or certainty of anything at all. 

I heard, for example, from a neighbour that there was a long period of time where the rental property was uninhabited and a load of building work was done to resolve issues with damp. 

There are no records of this - I don't know the time it was vacant for, how much the building costs were etc. 

Had I not had this chance conversation with a neighbour, I would've disclosed a whole year of rental income to HMRC that actually was never received (and paid tax on it out of my inheritance).

Given all this uncertainty, I'm leaning towards pulling out of this voluntary disclosure. 

I don't actually know for certain that he didn't pay tax. I don't know for certain how much or for how long he received rental income, so I'm questioning why the onus should be on me now to declare something that I have no knowledge, records or certainty of at all - and potentially end up with a tax bill of £20k+ (estimated by my accountant) - on top of the inheritance tax I'm already paying. 

My accountant urges me to make the disclosure - but they would, as they're being paid to do it for me. 

Does anyone have any advice on the repercussions should I just decide not to make this disclosure?

Thanks!

Hoenir

JohnRinson said:

Given all this uncertainty, I'm leaning towards pulling out of this voluntary disclosure. 

As the legal executor of your late father's estate liability will ultimately fall on you personally. Better to voluntary disclose than let the HMRC determine the liability. Speak to the accountant. 

RAS

Can you ask the local Council if he paid Council Tax on the property for any period? That would indicate it was empty or an HMO.

poseidon1

Your accountant is absolutely correct in recommending voluntary disclosure and doing a deal with HMRC in settling a figure for past non disclosure by your father.

You should be aware that if you make HMRC do their own investigations to ascertain your father was failing to pay tax on his rental income, the quantum of penalties they are legally able to charge is 100% of the tax avoided as well as the tax itself, as well as interest accrued over the years on the unpaid tax. You really do not want to leave HMRC to their own devices in this regard.

A friend of mind is already on notice that on his father's eventually  death, there will be undisclosed rental income on a London 2nd property going back to the mid 1970s, income tax thereon crystallising when time comes to administer the estate. It will be a nightmare!

You have not intimated whether your father's estate is large enough to attract IHT, but worth bearing in mind unpaid income tax ( once agreed) , is a debt on the estate in ascertaining the IHT value.

There is a certain art in negotiating settlements with HMRC in these circumstances, so hopefully your accountant has the requisite experience from past cases.

Keep_pedalling

That is one horrible mess your father has left you to clear up. You are going to have to deal with HHRC on this and they should be able to tell you if any tax had been paid or not, although it sounds unlikely with everything being cash in hand. Do the current tenants have a protected deposit? That could be another issue for you if they don’t.  

Income from rented property is based on profit the cost of the work should be offset against rental, but if that was cash in hand as well  you are going to have a hell of a job coming up with the numbers.

mybestattempt

A full disclosure should be made as the accountant advises.

There are time limits for HMRC to make assessments for the period before death:

https://www.gov.uk/hmrc-internal-manuals/compliance-handbook/ch54

For the amounts of rental income where there are no records, HMRC will normally accept reasonable estimates for earlier years based on the actual figures for the final period and they will take into account any other information about void periods etc. The accountant should be able to advise on this point.

RAS

Another way of looking for the tenancy information might be to search electoral rolls? Your local Council will have the full electoral roll at a central  location. You can't leaf through it but you can ask to see the page for the specific address for each year.

Obviously, tenants don't always update the electoral roll when they move in but once you have a name and date, www.192.com will give you more clues as to when they occupied and Ancestry (local library) possibly where they moved.

gwynlas

Unless your father was one of the first to go paperless there should be some correspondence regarding the rental property ie invoices cheque stubs bank statements etc. Accountants are usually quite good in delving into these matters and as suggested it is better to make a voluntary arrangement than face HMRC investigation and potential penalties. The residual estate will still come to you and you can make better provision for your heirs going forward.