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Can Ex-husband Use Self Assessment To Punish Wife?

Ex-husband spitting feathers uses tax system to get revenge on wife - is he allowed to do this?

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Wife (my client) recently divorces naughty husband. He now wants revenge because wife has got one over on him over a certain matter.

Husband scratches head looking for any possible means to punish wife. Comes up with brilliant idea.

Both are 40% taxpayers and jointly owned rental properties since ten years ago. Problem is, husband was control freak and wife had absolutely no idea about the rental profits or tax position. She never filled in a tax return - (did she ever know what one was?) But she was allowed pocket-money (he took her earnings).

Appears joint rental profit was taxed on husband (or so it would seem - maybe he didn't declare - who knows). Certainly wasn't taxed on wife.

Rather vague email just came out of the blue from husband's accountant with ten years worth of joint rental accounts. Message from accountant was cryptic. After asking accountant what I should do with 10 years worth of rental accounts she just said she would leave that to my professional judgement. There is a tiny clue that husband may try to amend his prior tax returns in order to instead tax half the rental profit, but that might be a red herring to throw wife off the scent - who knows. (It seems to me that the rather cryptic email is masking something underhand going on).

But what to do with the wife's tax returns. None have ever been submitted in the past. If it was all previously taxed on husband at 40%, the correct tax will have been paid. But if he now reverses half out, then equitably wife should be taxed on this other half.

But is husband able to do this. And what should I do as wife's accountant. Declare it or ignore it.

The husband cannot be trusted. He might try Overpayment Relief if he has declared the income. But is he entitled to rectify if he knew of the error all along. And he won't be able to get Overpayment Relief for all ten years!

As for the wife, is HMRC permitted to make a discovery assessment if she chooses to ignore the 10 years worth of rental accounts. After all, maybe the husband did disclose all of the rents on his tax returns. (She is an honest soul though with no intention to defraud HMRC).

But if she reveals all, I am fairly convinced HMRC will not go back over the whole 10 years. There is absolutely no chance she herself has intentionally defrauded HMRC.

But what is husband's real game. He and his accountant are keeping tight-lipped over the position. It is more than a little irritating that they have given me no idea as to what to do with the accounts.

Should I tip off HMRC. Are there moneylaundering issues for the husband. Should I report husband's accountant to her professional body for the most unprofessional email I have ever seen in my 99 years as an accountant (sorry, 30 years - they had no emails back in 1919 (or even 1988) - but you get my drift)

Oh, what a lovely mess.

Can anyone give me some helpful direction on this. I did playfully ask husband's accountant if husband would care to pay wife's liability out of his consequent tax repayments but that has been met with a stunned silence.

But the time for taking the gloves off may be fast approaching!!!!

 

Replies

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25th Jan 2018 07:11

Have a read of http://www.bailii.org/cgi-bin/format.cgi?doc=/uk/cases/UKFTT/TC/2017/TC0...(vowles) - you do need to talk to W, about making a full disclosure to HMRC (unprompted) and explaining all the circumstances in detail - including the control/pocket money aspects. As it currently stands, HMRC hasn't actually lost any tax IF H has been paying at 40% throughout (although expect it to look for interest and penalties - your actions now should be all about penalty mitigation).

You say that W is a 40% taxpayer too? What does she do? Is it earned income? HMRC may be less willing to accept that she is an abused person with no knowledge of the requirement to submit a return if she's holding down a high powered job or would be considered financially sophisticated?

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25th Jan 2018 09:08

Firstly, not your game is it? Try not to be drawn into spats like this.

He cant get relief on restatement very far, and from her point of view it would be at best "innocent error" she had nothing to do with it so that restricted the carry back period.

I would start with the divorce settlement.

Who owns the property post divorce? if he does ongoing then quite possibly not your problem. If its joint, has she seen the money? If not, then still not her problem.

Id probably do nothing this week, but when you have the facts, then go back formally and go from the divorce settlement,

If its not settled, then its open season, and worth working with her lawyer on a fight back. Along the lines this is the tax you will be paying on behalf of your client (full 10 years tax + int + penalties), and you expect him to cough for it. Which he won't be able to get back, so own goal.........you can have heaps of fun with this sort of stuff. But not last week in Jan. This is not urgent.

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25th Jan 2018 09:23

Have you discussed with wife's lawyer? if he has unfairly retained assets (her share of the income), or landed her with liabilities (tax bill), then that should be taken into account in the settlement shouldn't it?

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25th Jan 2018 09:32

I am wondering if H's accountant feels that H has put him (her?) in a difficult position & hence is being very cautious. Also it is possible H's accountant has filed a SAR & wants to avoid 'tipping off'.
You seem to be thinking that H probably had declared the rental income - but it is possible that he hadn't & this has come to his accountant's attention only from the fall out (in more than one sense!) of the divorce.
You have to consider what your client should have declared on the facts (i.e. what she actually received or a half-share?).
You should assume, I suggest, that the rental schedules have recently been submitted to HMRC & therefore some disclosure by your client should be considered (let property campaign disclosure?).
You also have to consider whether you need to make a SAR (about husband, or wife, or both).
David

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to davidwinch
25th Jan 2018 09:50

David raises a very interesting point.

Which could possibly be solved with a phone call to the other accountant with some carefully worded "theoretical" questions, which if they have sent this to you to quite frankly be helpful, they would probably play ball with.

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26th Jan 2018 19:01

There is a more relevant case than VOWLES concerning such a situation (I am too busy today to find it, so if someone could post a link to it that it would be helpful) where basically whoever is found to have been a beneficiary of the cash from the rental profits will be taxed on it accordingly.

[EDIT] I found the case in the link below, which says the opposite of what I thought it said & I think I confused this with VOWLES, but VOWLES was re shares with no 50/50 deeming rule, so there seems to be a potential problem after all:

http://www.bailii.org/uk/cases/UKFTT/TC/2013/TC02806.html

Perhaps you can try argue that s 271 ITTOIA 2005 means that as she never received the money and he did then he's taxable on all of it (i.e. both his entitled received share and his unentitled received share of the profits).

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26th Jan 2018 10:08

My concern is that by doing nothing the poster could be at risk - as laid out by others and also by David Winch's very good advice.

If it were me I would avoid speaking with the other accountant and would spell out in a letter to the wife her obligations in respect of the rent and also that she should have completed a tax returns.

I would then calculate the potential tax. Next I would with her consent sent a copy of what you have told her together with the tax calculation to her lawyer.

Next I would use the let property disclosure to cover the tax liabillities. having just done one HMRC only went back 3 years dispite the 7 year disclosure. David Winch mentions this.

I think that you have to make a SAR but you can temper this with the facts that your client is making a disclosure to HMRC.

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26th Jan 2018 11:06

Husband not to be trusted? You are based i suspect you have heard only one side of the story

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By ShayaG
26th Jan 2018 11:16

Does jointly owned property necessitate jointly split proceeds of trading income? I can see I'm in a distinct minority here, but it appears that W (who, as a 40% tax payer, seems to be reasonably affluent and in a position to make the decision notwithstanding suggestions of coercive behavior) has implicitly agreed with H that H takes 100% of income in return for dealing with the admin on the property - a not altogether unreasonable proposition. H then cannot retrospectively dump admin and profits on W in what appears to be a malicious and vindictive move.

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to ShayaG
26th Jan 2018 13:44

But this position is only valid if the facts fit and the appropriate form 17 has been filed. Unless as someone commented later the actual ownership was not joint. I would certainly check the land registry.

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By ShayaG
to coolmanwithbeard
29th Jan 2018 14:24

I'm with you that the default position is that if you jointly own property, you jointly pay tax on that property unless you agree to the contray. Land registry Form 17 would be one way of evidencing an agreement to the contrary -but so would a written agreement or even a verbal agreement if the existence of the verbal agreement can be evidenced.

Nevertheless you are probably right - there can be no implicit agreement on division of property income - and it sounds that in this case no such conversation or agreement ever took place.

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26th Jan 2018 12:52

Husband not to be trusted? You are biased i suspect you have heard only one side of the story

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26th Jan 2018 11:24

I would agree with Paul Johnston's recommendations. However, I would check the ownership of the properties at the Land Registry first just in case someone is trying to pull a fast one and create unnecessary work all around. You should have all the property details, including acquisition prices, improvement schedules for future CGT reference, etc., from H's accountant so there is a full transfer of information. Nothing like giving H's accountant some work to do.

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26th Jan 2018 11:24

I would agree with Paul Johnston's recommendations. However, I would check the ownership of the properties at the Land Registry first just in case someone is trying to pull a fast one and create unnecessary work all around. You should have all the property details, including acquisition prices, improvement schedules for future CGT reference, etc., from H's accountant so there is a full transfer of information. Nothing like giving H's accountant some work to do.

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By wamstax
26th Jan 2018 13:00

Whatever you are considering you need to take into account HMRC's attitude that is contained in PIM1030
https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030

"However, where the joint owners are husband and wife, or civil partners, profits and losses are treated as arising to them in equal shares unless:
both entitlement to the income and the property are in unequal shares, and
both spouses, or civil partners, ask their respective tax offices for their share of profits and losses to match the share each holds in the property."

You also need to think of the penalty mitigation (could be 0% penalty for innocent error etc ) and the need to advise HMRC of a taxpayers potential tax liability as soon as it comes to her/your attention or knowledge. I note what you say re domination by husband but clearly somebody that has got one over the husband in settlement might not be as naïve as you are presently thinking.
Yes the SAR is an important thing now that you are aware and of course it could be particularly relevant if the rentals went into a joint banking account as your client's knowledge would be present and she should have at least considered taxation - or is she trying to pull another fast one and shift the tax on to her husband.
Sorry - I am alive to all the possibilities but you need to take a step back and think of matters both from your own professional standards (and the need to protect your client's interests) and the priority of letting her sleep at nights knowing the taxman isn't coming after her. Whatever happens - and I doubt if the husband would be as stupid as to submit an overpayment relief claim( after all he knew exactly what he was doing - whether or not he did return his income for taxation) BUT if he does or now Notifies his chargeability it is inevitable that HMRC will become aware of your client's perceived shortcoming. Of course if she hasn't submitted any tax returns then assuming that she has a tax liability her offence would be failure to notify a source and carelessness allows HMRC to go back up to 20 years.

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26th Jan 2018 13:40

Thanks for all the very helpful replies so far. I obviously need to do more digging. But too many tax returns to finish off first. In response to the answers all I can say at the moment is:
a) it would appear that the property rentals have been used to finance those property purchases and ex-wife then received proceeds of property sales as part of divorce settlement after property mortgages repaid. Therefore properties no longer owned by either. So in a circuitous way she has received the rents but after the divorce. There is no indication she ever "saw" any rents when they arose, but they would have serviced the loans. They never made massive capital gains on the property sales.
b) wife's earns around £50k a year as civil servant, but is not a "numbers" person, so it is feasible the wool could have been pulled over her eyes about the absence of her tax returns in relation to the rents. She has just admitted she was completely clueless about the rents. Husband said he would "deal with all that stuff" himself.
c) it would appear that properties were never improved at all and were in great shape throughout.
d) wife is all set for making a full disclosure.
e) husband is definitely a naughty man.

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By DJKL
to penelope pitstop
26th Jan 2018 18:32

Re (b) presume she is not a civil servant working within HMRC.

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to DJKL
27th Jan 2018 00:00

No. Definitely not working for HMRC. She is paid under PAYE and may have never seen a tax return in her life.

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By ShayaG
to penelope pitstop
29th Jan 2018 11:07

A divorce settlement paid by H to W is(obviously) *not* taxable income. The question is whether the income was taxable on the wife at the time it was earned. I'm still far from convinced that it was.

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By ShayaG
to ShayaG
29th Jan 2018 14:26

I'm reverting now. Unless W states there was an explicit agreement that H takes costs and income from property business in the tax years in question, then it is properly taxable on her.

If the amounts involved are material she might look to go back and re-litigate the divorce settlement. But probably best not.

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26th Jan 2018 16:04

Whose name (s) was the bank account in that the transactions went through? Or if an agent was used did they correspond with H or W or both? Something to throw into the mix!!

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26th Jan 2018 17:16

This is a complete dog s breakfast with everyone having an opinion but no one correctly predicating the outcome...which is akin to guessing who will win tomorrows 3.30 race wherever.

I certainly do not kniw the answer and certainly HMRC do not off the cuff. After prolonged meditation they will come up with sonething and wait for it to be taken to appeal.

What a sad commentary on the tax collection fraternity of all ilks.

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By swatt66
26th Jan 2018 17:25

If you jointly own rental properties you might be expected to know what is going on.
I suspect the husband only declared half unless he wanted to donate to HMRC.

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26th Jan 2018 18:20

I had a slightly similar situation with a client. Husband has a property portfolio and wife had no idea that she was a joint owner on 2 of the properties. Both are 40% tax payers. She is an articulate, intelligent woman with her own businesses and is in SA. Husband had no idea that she should have been declaring half of the rents. The rents all went into his business account. Fortunately they are not divorcing.

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By GrayMan
27th Jan 2018 09:56

Knowing how difficult it is to persuade the inland revenue that anything paid to a wife who carries out no activities for a business is an allowable deduction this seems unlikely. As a minimum there would need to be business books showing the actual salary or drawings and firm evidence that this was paid regularly. Simply redrafting the balance sheets dividing everything equally could leave him in debt to his "partner." The only virtue would be she would be unlikely to divorce him until she'd had her money back!

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to GrayMan
29th Jan 2018 12:49

what on earth are you talking about , she is joint owner of the property and in the absence of a from 17 is taxable on her share of the net income

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to GrayMan
29th Jan 2018 13:10

The rental property was owned 50/50 so there is no salary, just an income and expenditure account prepared by husband's accountant whose email attached rental accounts for all previous years. The email was in cryptic tones and implied (but did not say) that 50% should be taxed on wife. A later email suggested I should be guided by my professional judgement as to what to do with the accounts.
But my professional judgement was split two ways. Half of me wanted to declare 50% of the income whereas my "dark side" wanted to line the waste paper bin with the accounts!

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29th Jan 2018 15:05

Alternatively, since it is axiomatic that tax law ignores nominees (unless expressly stated otherwise, like Sch 16 Para 3 FA 2003), I think s836 ITA 2007 could be narrowly construed to mean as follows:

"836
(1) This section applies if income arises from property [beneficially] held [as joint tenants or as tenants in common] in the names of individuals [who legally jointly own it]…"

So that you can then hang your argument on Vowels after all (and see my s 271 ITTOIA 2005 "received" point above too).

There may be some arguments per the bottom of p181 in the link below:

https://books.google.co.uk/books?id=QRa8gec09A0C&pg=PA181&lpg=PA181&dq=8...

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