Rental Tax - Now Scared :-(

lukewarm_2

Hi

Wonder if anyone could advise me, I'm in a right pickle :-(

I had a house which I bought around 13 years ago. I lived in the house from when I bought it as my main residence for around 18 months. I then bought the house I live in now, and rented the first house out for the following 10 years or so. The first house was bought with a private mortgage from a friend, hence no interest. I instead agreed to pay a figure above the market value at the time. The rent I received monthly was exactly the same amount I was paying back on the private mortgage. I called the tax office years ago, and they said I would not be liable to pay tax as I was not gaining over what was going out. I now find this may not be the case :-(
In 2004 I paid off the private mortgage early and took out a normal mortgage on the house at roughly 50% its market value to pay off debts etc.
Three years ago I became self employed (lost my job). I decided I wanted to sell the first house, so I completely renovated the house myself at quite some cost and hours (borrowed money from parents!)
I sold the house a year ago now. I then paid off all my debts and the mortgage and used the rest of the money to do up my house to sell (to downsize) and to live on for the last year.

I am now 3 years behind with tax returns and NI constributions(complete with fines) and have not really been working or earning anything the last two. I'm just utterly confused and depressed :-(

Can anyone confirm I would have to pay the tax on the rent? Should I even declare I had the house?

It's a cloud over me and I want to sort it all out now as I can't cope anymore now I've been told I should have paid the tax :-(

Thanks everyone.

chappers

Would have though you should have been paying tax as only interest on a loan is allowable against tax and as you weren't paying any there was nothing to set against tax, although it could maybe be argued that you were only paying the interest at whatever the relevant rate would have been to match the rent.
What agreements did you have between yourself and your friend, you are right it is a bit of a pickle, there may also be a CGT issue with regards to the house you sold.

lukewarm_2

chappers wrote: »

Would have though you should have been paying tax as only interest on a loan is allowable against tax and as you weren't paying any there was nothing to set against tax, although it could maybe be argued that you were only paying the interest at whatever the relevant rate would have been to match the rent.
What agreements did you have between yourself and your friend, you are right it is a bit of a pickle, there may also be a CGT issue with regards to the house you sold.

The agreement was drawn up by a solicitor that I should pay him an agreed sum every month until the mortgage / loan was paid off. I could pay it off early if I wished which as I mentioned I did, at which time the solicitor wrapped the purchase up and changed the title deeds etc.
Can I offset any of the hours whilst renovating it? I spent a whole year of my time doing it - and spent something like 12k.

I did look into the capital gains tax and used a software calculator to work it out (some 7 or so equations!). It worked out that as it was once my main residence I could clam different reliefs etc and wouldn't be liable for CGT.

Aside from that I don't know
I'm still very much a tax newbie - probably why I have shoved my head in the sand for so long which I know isn't the answer :-(

Thanks

lukewarm_2

OK, I spoke briefly with an advisor and it seems I will indeed be liable for tax on all of the rental income + penalties + interest + possible CGT _pale_

If any of the private mortgage was considered interest I've been advised they will chase my friend for his taxable gain!

I'm trying to keep my calm, but I'm not doing very well.

Would the CGT calculation be done using the calculation in force when I sold the house in 2007 - or using the new calculation? I understand the calculation has changed this year.

You ever feel like you want to go asleep and never wake up......

oompahloompah

Hang in there Lukewarm, and do all your calculations.
Tot up the rent your received for each year you rented it out.
Again for each year add up all the costs associated with the property - (although you say there was no interest on your private mortgage, if you were paying back more than you borrowed that is interest), repairs bills, decoration costs, factors fees, agents fees etc etc - everything you can think of. You are also (as far as I am aware) allowed to claim for travel to the property (for inspections etc) and for phone calls/postage etc in relation to the rental. Also if the property was rented out furnished you can deduct a "wear and tear" allowance of 10% of the rental income. Add all these figures up, deduct from the rent you received and you should only be taxed on what is left (if anything).
It is so frustrating when you are initially given the wrong advice when you are trying to do the right thing; this has happened to me several times with the IR.
Check out this link too http://www.taxaid.org.uk/tax_debt.cfm?secnav=2
Let us know how you get on.

lukewarm_2

oompahloompah wrote: »

Hang in there Lukewarm, and do all your calculations.
Tot up the rent your received for each year you rented it out.
Again for each year add up all the costs associated with the property - (although you say there was no interest on your private mortgage, if you were paying back more than you borrowed that is interest), repairs bills, decoration costs, factors fees, agents fees etc etc - everything you can think of. You are also (as far as I am aware) allowed to claim for travel to the property (for inspections etc) and for phone calls/postage etc in relation to the rental. Also if the property was rented out furnished you can deduct a "wear and tear" allowance of 10% of the rental income. Add all these figures up, deduct from the rent you received and you should only be taxed on what is left (if anything).
It is so frustrating when you are initially given the wrong advice when you are trying to do the right thing; this has happened to me several times with the IR.
Check out this link too http://www.taxaid.org.uk/tax_debt.cfm?secnav=2
Let us know how you get on.

Well it was rented to a close friend so no agents etc. The monthly rental figure was exactly the same as went out to pay the mortgage. As he was a friend he looked after the property himself, the only expense I had was the insurance each year. It amounts to some 26K over the years. I was also in full time employment so used up my personal allowance. So basically I've had it haven't I? With the penalty and interest It's going to be a huge sum that I just can't even think about.... Thank you HMRC for your great advice.

CLAPTON

as far as the CGT situation is concerned the calculation while a little complicated is nevertheless straight forward
if you wish to post the details we can work it out for you

i.e.
purchase price
and the actual market value at that time
when (month and year ) you bought it
how long you lived there
how long you rented it out
when you sold it
how much you sold it for
buying and selling costs

you can't claim against the time you spend doing it up
however improvement (but not maintenance ) can be claimed .. so how much did you spend on improvments (and do you have receipt etc.)


as far as the rental issues are you need to list on a year by year basis

rental income
maintenance expenses on the property
any other allowable costs


I'm as bit unclear about how the HMRC will view the loan agreement but clearly if you friend made a profit then thye should have declared this to the HMRC.

However this should be enough to make a rough estimate of the tax consequences.