Share this content
19

Correcting rental income on tax returns

Didn't find your answer?

A client is selling a rental property and it has come to light that the property is owned jointly with his wife whereas he has put all the income on his tax returns. 

Property rented for 5 years, I did last 3 returns, he is a basic rate taxpayer, she earns just under the personal allowance.

How would you proceed? 

Him: Revise 2018-19 and 2019-20 as in time and claim overpayment relief for earlier years (is he in time to do this?)

Her: Let Property Campaign 

Or is there any way to argue no loss of tax to HMRC and sort this out a different way?

Thanks for any thoughts.

Replies (19)

Please login or register to join the discussion.

By djn24
10th Sep 2020 08:24

The correct way to do it would be to amend previous tax returns.

The hassle of that and the fees you'd charge the client to do all that is probably not worth it.

Personally, I would have a chat with the client and tell them what should be done but say that you could just ignore it. If hmrc ever ask questions then they haven't lost any tax take but actually gained.

I wouldn't want to amend them myself just too much hassle for whats at stake.

Thanks (0)
By SteveHa
10th Sep 2020 08:35

In similar circumstances I've had a chat with HMRC and have them agree to let it go on the basis that there is no loss to the exchequer.

If you get someone with half a brain in HMRC they will tend to accept the easy "do nothing" option.

Thanks (0)
Psycho
By Wilson Philips
10th Sep 2020 08:37

Has he also put the expenses on his own returns?

;-) ;-)

Thanks (0)
Scooby
By gainsborough
10th Sep 2020 09:33

Same as Steve Ha, I've had HMRC agree to let a similar situation go in the past after explaining no tax lost. I'd be reluctant to ignore it completely in case HMRC come after wife in the future for late filed returns.

Thanks (0)
avatar
By Justin Bryant
10th Sep 2020 16:30

You can just about argue that the legislation (properly construed) should apply to joint BO, rather than joint legal ownership, in which case (assuming you [Edit: don't] have joint BO) there is no problem to solve.

Thanks (1)
avatar
By CJaneH
10th Sep 2020 11:06

An aside comment, should we check ownership with land registry when we take on new rental income clients, or client acquires a property and we have not seen much documentation. At £2.00 a property not very expensive.

I have done it in the past, but not as standard for all.

Thanks (0)
Replying to CJaneH:
Psycho
By Wilson Philips
10th Sep 2020 11:20

I wouldn't bother - it's the client's responsibility to let you know, prompted if necessary, who owns the property (whether legally or beneficically). If they say they don't know then yes run a check then. Otherwise it's their problem if they've got it wrong.

Thanks (0)
Replying to CJaneH:
avatar
By Paul Crowley
10th Sep 2020 15:01

Did not used to
But have come across so many
Usually husband declares all and tax inefficient
Definitely checked one recently as relying on son to translate

Would not now rely on old accountant to be correct
I now always ask and prefer to see completion statement

Thanks (1)
avatar
By fawltybasil2575
10th Sep 2020 11:29

@ Matrix (OP).

I agree entirely that a (written) request be made to HMRC, to apply the “no loss to the Exchequer” principle. However, before submitting that request, it is essential to obtain formal written confirmation, from the client, that he agrees to such approach. Such letter should quantify the potential Income Tax Overpayment which the client is foregoing, and explain that such figure is in principle equivalent to the Income Tax saved by the client’s wife (expanding thereupon briefly to state that for simplicity you have disregarded the potential Interest/Penalty aspects which would normally be slightly beneficial, when taking into account the effects on the client and his wife jointly).

The reason for this is that if, in the next couple of years, the client separates from his wife, he might (legally, albeit perhaps not morally) rightly claim against you for not seeking a repayment from HMRC for the Income Tax overpaid (and of course prior thereto submitting the appropriate amended Tax Returns and Overpayment Relief claim) by him.

Implicit in your question is that you act for the “client” only (ie not also for the client’s wife): if in fact you also act for the client’s wife, then a further letter should be obtained, from the client’s wife, in similar vein to the letter to be obtained from the client.

Under normal circumstances, HMRC will indeed acquiesce in the “no loss to the Exchequer” submission. If the initial HMRC response is a rejection, then request a review. If ultimately HMRC still decline to agree the “no loss to the Exchequer” approach (unlikely, but possible) then the only alternative is the “longer route”(per my second paragraph above). Claims for Overpayment Relief must be made within 4 years of the end of the relevant tax year, and are not automatically accepted by HMRC – see this link:-

https://www.taxationweb.co.uk/tax-articles/general/overpayment-relief.html

[There is nothing to prevent the submission of a “late” Overpayment Relief Claim, for out of date years, and appealing against any rejection thereof (the UTT case of Vasiliki-Raftopouklou v. CRC considered such point)].

At the risk of causing offence, can I point out that when you took on the client a few years ago, the “Know Your Client” requirement should have include ascertaining the material assets of the client, including of course the property at issue: did you specifically ask the client whether that property was owned solely by him or alternatively (as would frequently be the case) jointly owned with his wife ?

Frankly, the “do nothing” approach is simply NOT a valid option, and could expose you to a PII claim and a complaint to your governing body.

Basil.
EDIT. My above post prepared prior to seeing the 11.06 and 11.20 posts above re ownership: IMHO a proactive approach should be taken re questioning ownership of properties (and other material assets) and further enquiries should be made if one has any doubts.

Thanks (0)
Replying to fawltybasil2575:
avatar
By Justin Bryant
10th Sep 2020 11:50

You can take a legitimate do nothing filing position based on the above tenable interpretation of s 836 ITA 2007 (this has been mentioned a few times before here).

Thanks (0)
Replying to Justin Bryant:
Psycho
By Wilson Philips
10th Sep 2020 12:06

I don't follow how s836 results in a do nothing position. Assuming, per your earlier comment, that there is joint BO and that s836 applies to BO rather than LO, why would there be a "do nothing filing position"?

Thanks (0)
Replying to Wilson Philips:
avatar
By Justin Bryant
10th Sep 2020 14:37

Crumbs, you're correct for a change! I obviously meant assuming they don't have joint BO of course.

Thanks (0)
Replying to Justin Bryant:
Psycho
By Wilson Philips
10th Sep 2020 14:54

On this occasion I don't think that anyone will object if you go back and correct the error in your earlier post ;¬)

Thanks (0)
Replying to fawltybasil2575:
Psycho
By Wilson Philips
10th Sep 2020 12:00

fawltybasil2575 wrote:
IMHO a proactive approach should be taken re questioning ownership of properties (and other material assets) and further enquiries should be made if one has any doubts.

Pretty much what I said.
Thanks (0)
My photo
By Matrix
10th Sep 2020 13:08

Thanks all.

I spoke to HMRC technical helpline and they suggested writing a joint letter arguing no loss to the exchequer and they probably won’t require the returns for her (in fact the client has overpaid a few hundred pounds a year as the wife had some room in her basic rate band but it is probably not much different to the costs of a tax return). I have proposed to the client that I amend 2018-19 for him, engage her as a client and file 2018-19 and 2019-20 and write the letter.

I never proposed doing nothing so I don’t know where that came from.

Understood regarding KYC, but this client came from someone who passed me her client portfolio and 100% of the rent was already treated as his income. It was a bookkeeper who thought of it as his self employment it seems, but luckily put it in the right pages though.

Interestingly the client knew there would be two annual allowances on sale when we discussed yesterday, so must have taken advice at the time so why they didn’t know to also split the income and tell me, I don’t know.

Thanks (0)
avatar
By ingrat
16th Sep 2020 09:50

We had a case where both HR taxpayers but there was a tax loss as the husband's PA was subject to tapering, it also impacted on his pension relief calculation so we had to make a disclosure.

Thanks (0)
avatar
By geoffmw1
16th Sep 2020 12:26

If the rental income has never appeared on the wife's tax returns which presumably have not been made in any event, how will the CGT position be acceptedby HMRCwithoutbquery

Thanks (0)
Replying to geoffmw1:
My photo
By Matrix
16th Sep 2020 13:32

Because the clients are making full disclosure. Which has nothing to do with the sale although your point is valid.

Thanks (0)
Replying to geoffmw1:
RLI
By lionofludesch
16th Sep 2020 14:08

geoffmw1 wrote:

If the rental income has never appeared on the wife's tax returns which presumably have not been made in any event, how will the CGT position be accepted by HMRC without query?

Well, I for one would be surprised if HMRC noticed this. In fact, I'm surprised that anyone would suggest they would.

They'll just assume it's a property that's never been rented out.

Thanks (0)
Share this content

Related posts