HMRC target property owners with their latest hit squads
The group to come under the investigation microscope next will be property owners who are either letting or selling property and not declaring the income tax or capital gains tax due.
Initially the taskforce, several hundred strong, will primarily focus on the South West of England and South Wales and I can only surmise HMRC consider that a lot of people have second homes, holiday cottages or rented properties in these areas.
The second reason for picking these areas for their first strike, is that these parts of the country have enjoyed significant growth in house prices over recent years, greater than most of the rest of the UK.
- Taxable gains on sales of properties – Liable to Capital Gains Tax (CGT)
- Rental profits – Liable to tax as Income from Property
The taskforce is likely to review the Land Registry’s records of properties bought and sold and then match each record to the taxpayer’s tax returns for that year.
There could be difficulties in relation to complications around Principle Residence Relief, for the taskforce, but there should be ways of working out who has and who has not lived in a property that has been sold; with most of this information coming from public records, such as the electoral roll.
HMRC say that their previous Taskforces have been successful in unearthing undisclosed gains. They quoted two cases from their last foray into this area three years ago, when a Barrister made a gain of over £400k and didn’t declare it and a property consultant did not disclose property profits of over £750k, with both individuals now having criminal records because of their failures to fess up.
If a taxpayer thinks that they may have a gain which has not been disclosed to HMRC, then all is not lost. The overall result will invariably be better, in terms of penalties and HMRC’s general attitude, if a late disclosure is made. Also time can be taken to look at all the reliefs available to a taxpayer, to make sure the taxable gain returned is as low as possible.
The method of disclosure can be discussed before it is made, but the avenues available now include the Let Property Campaign which potentially provides better terms for disclosure: www.gov.uk/let-property-campaign
HMRC have issued a statement that they accept that in most cases when they find a taxpayer has not declared rental income; the non-declaration is most likely not to have been a deliberate act of tax evasion.
A few actual case studies from the “Let Property Campaign” site will illustrate how mistakes can happen:
Brenda age 23
- Moved to Leeds to work in finance sector and purchased 2 bedroom flat to live in when she got there.
- She started a relationship and after 18 months moved in with her partner.
- Rather than sell her flat, which she saw as a good investment, she decided to rent it out. The rental income just covered the mortgage payments.
- She makes no SA Tax Returns and her only dealing with HMRC is through the payroll of the company that employs her.
- Brenda’s total mortgage payments are circa £8000 per annum and the rent she receives is £8,400. She also has agent fees and maintenance costs to pay of approximately £1,000 p.a..
- In Brenda’s eyes she considered that she’d made a small loss as she did not know that only the interest payments on her mortgage are an allowable expense for tax purposes and that any repayments of capital to her mortgage provider cannot be claimed.
What Brenda should have done was tell HMRC about her rental income, which gave her around £2,000 profit (after allowing for interest payments and other expenses, maintenance, etc). As the profit was below £2,500 she could opt to have this tax collected by way of an amended PAYE code number.
John age 53
- John inherited a property in a seaside town and had no personal debt other than routine month to month expenses.
- Interest rates are low and John felt that rather than sell the property and put the money in the bank, he would rent it out (holiday lets mainly); get a better return; and still be able to use it himself.
- He starts renting out the property and as he is not registered for SA and because he is still using the property periodically throughout the year, it doesn’t occur to him to tell HMRC that he is receiving rental income.
John should be declaring all of the rental income after deducting allowable expenses and paying any tax due.
Alan (44) & Sue (43)
- Alan and Sue have purchased a flat for their son, Stephen, as his accommodation while he is at university. They are responsible for the utility bills and mortgage payments. Stephen makes no payments regarding the flat to his parents.
- As the flat is relatively spacious, three of Stephen’s friends move in with him and pay a modest rent to Alan & Sue, which in their eyes only reduces the financial help they’re giving to their son.
- Both Alan and Sue are employees and have their tax deducted under PAYE.
- As the arrangements with the flatmates are informal Alan feels he is doing them a favour and such informal arrangements are not income you are taxed on.
Unfortunately for Alan & Sue, they both need to return the income to HMRC after deducting allowable expenses, which should exclude Stephen’s share.
- Anna purchased a property with a ‘Buy to Let’ interest only mortgage some years ago, with the rental income in the early years not quite covering the payments and the shortfall was met from her savings.
- Following the credit crunch Anna sees the value of his property fall into negative equity and she has no choice but to continue to rent out the property
- However, as the interest rates fall he begins to notice that rent each month is now in surplus and he no longer needs to top up payments anymore.
Anna now needs to disclose the rental income but as she has historic accumulated losses, these can set off against subsequent rental income provided she has kept records.
- Brenda has moved in to a residential care home
- The care home fees of £1,200pm are largely covered by Brenda renting out her former home through a letting agency, with the balance coming from her pension, leaving her with a modest £80 each week for herself.
- As Brenda does not make any profit from the rents (they all go to pay her care home fees) she believes she does not have to return the income to HMRC and anyway, it’s done through a letting agency so they would have told her if there was tax to pay!
I have a lot of sympathy for this lady, but she should be making a return to HMRC of the rent. This is because, although she uses all the income from the letting to pay fees, that use is private and not an expense of her letting. She can deduct allowable expenses and any fees paid to the letting agency.
- Geoff’s wife Edna passed away 12 months ago.
- Geoff decides that he would like to rent out the spare room in his house as it will help him make ends meet and he would probably appreciate the company.
- His friend Frank moves in with him and pays him £150 per week.
- Geoff mistakenly believes that he does not need to tell HMRC about this income as he has heard from another friend that you can rent a room in your own house without paying tax. This is due to something called Rent a Room relief.
- In fact Rent a Room income is only tax free for rental income below £4,250 per year.
Geoff should have told HMRC about this additional income of £3,550 above the threshold for rent a room relief. The income is liable to tax as the £4,250 relief in theory covers all additional expenses, cleaning, heating etc. However, if Geoff provides his friend Frank with any food and drink, this may be deducted.
- Dan’s mum dies and he inherits her house in Cheshire worth £350,000
- Dan does the right thing and puts the estate through probate which is granted after a modest Inheritance Tax bill is paid.
- As Dan is about to retire, he decides to rent out the property to supplement his pension and correctly notifies HMRC and starts completing tax returns and paying the tax due.
- 5 years later Dan’s health starts to deteriorate so he sells the rental property, receives £430,000 from the sale which he divides between his children and grandchildren.
- At the end of the year Dan completes his SA return as usual for the rent received, but does not include the sale as he mistakenly believed that having paid IHT, he had no further liability.
Dan should have included the house on his tax return and paid CGT on the profit, less the costs of selling and less his Annual Exempt Amount (£11,000 for 2014/15)
“Most individuals who either don’t declare rent or a gain are not deliberate evaders; they are just ignorant of the tax law. They think because they pay out more than they receive they are not making a profit, and I have found around 80% of the time that is the case, especially if they were tied in to expensive mortgages before the rates crashed.
A Tax Accountant’s view
Yes they should have told HMRC, but the case studies (with the exception of John) all illustrate that the individuals were, in their own minds, not making a profit and there was therefore no need to tell HMRC. Or to put it another way, any non-declaration is more likely to have been a sin of omission and not commission.
I just hope that when the new taskforce inevitably turns up more Dans, Annas, Geoffs and Brendas, that they treat their cases with sympathy and not have their normal knee-jerk reaction of assuming calculated and deliberate evasion in order to rack up the penalties!