A new client has been in receipt of rental profits (£3,000 pa) on her ex-home for the last 10 tax years since 5 October 2010. She was never registered for Self Assessment and HMRC have caught up with her due to HMRC checks in the local area.
Client went through a messy divorce some 12 years ago and ended up with the young kids with no support from the ex-husband. As a consequence, client has been on anti-depressants and anxiety medication for the last 12 years. Client reckons she was advised by the estate agent at outset that rents were exempt under rent-a-room rules. Client says she was in such a bad way she and her kids had to be taken in by her parents thus leaving her home empty for letting through an agent. It also appears that the net rents have always been paid across to client's parents as "board and lodgings" payment for them taking the client and her kids in to their large home.
HMRC Compliance have issued tax calculations for the 10 tax years 2010/11 to 2019/20.
My first question is why is it HMRC can now go back and demand tax and penalties for those last 10 years due to "Failure to Notify", whereas if she had already been filling in Self Assessment tax returns for some other income then HMRC may have gone back just 6 years due to carelessness. Client reckons she would never have deliberately avoided disclosing the profits. It seems that the heady mix of divorce, medication, sloppy estate agent advice, being a single mother and not benefitting from the net rents resulted in client giving the tax position scant consideration.
The second question is, if tax is in fact payable for all ten years, is client in with a chance of no penalties for "reasonable excuse" based on the above information.
A route I have been reluctant to go down so far has been the "beneficial interest" avenue. This is probably because I do not have the stomach to argue this point, and I do not know where it will lead.
If client's parents have always received the net rents by standing order from the estate agent then maybe the parents have a beneficial interest in the rental property. The retired parents have spare personal allowances so it would be in the family's interest for the parents to be taxed on the income. However, the client pays the rental bills so maybe that "muddies the water" somewhat. The latent capital gain on the rental property is probably within a single annual CGT exemption, so CGT and beneficial interest from a CGT viewpoint is probably unimportant in this case.
Any helpful comments would be appreciated.