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No tax returns filed for 12 years

No tax returns filed for 12 years yet no tax due in this period

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My father in law is a pensioner living off state pension only but supplementing his income with a very moodest income from a  rental property. It has just come to light that he has not filed ANY tax returns since he bought the property outright in 2006.. believing wrongly, that since he had no tax liability he wasnt required to file returns ! I am tax literate and have prepared his accounts to date..and indeed he has had no liability for income in any of these years ( his combined pension and rental income being below his personal allowances each year). However it now looks like, if he is discovered, he could receive a penalty from HMRC for each year he did not file a return..and I believe this works out at £1600 for each year not filed. Would it be wise to come clean under the HMRC "Let Property" scheme ..and if so what penalty do you think he will get away with...£1600 for each of the 12 years seems extreme ! It looks like his actions would be deemed as "wilfull" and the HMRC site suggests they would go back up to 20 years and since no actual tax is owed , it seems that there would not be a reduction of the penalty under the scheme. Any help would be really appreciated as it is causing him worry and he is 86 years old !

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By 356B
15th Jun 2019 18:12

What "let property scheme"?
Current HMRC requirements are:https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-work...

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15th Jun 2019 18:15

You say "since he had no tax liability".

Is there a liability for any year ?

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to lionofludesch
15th Jun 2019 18:25

no..there is no tax owed for any of the years

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15th Jun 2019 18:57

12 years ago the personal allowance was just £5,035 with a basic state pension circa £4,500. That doesn’t leave much personal allowance to cover the rental income.

What was he renting out?

Let property campaign is the way to go. Probably best to get an accountant involved.

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to Adam12345
15th Jun 2019 19:03

Hi..he is 85 years oldno..so back then he was eligible for the increase personal allowances for those 65-74 years old and 75+

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to Adam12345
15th Jun 2019 19:32

for a 65-74 year old 2006/7 personal allowance was £7280

and £7550 in 2007/8

and in 2008/9 he was 75 years old so he benefited from the 75+ personal allowance of £9180

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By Rweaver
15th Jun 2019 19:49

May I respectfully suggest your statement “I am tax literate” is incorrect. You appear to be sailing up a dead end.

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15th Jun 2019 20:58

You say you are tax literate but if there is no tax liability then no tax returns are due so you are not only wasting your time, you are needlessly stressing out your father in law.

I think it is very unlikely that no tax is due however, so I think you need professional advice quickly before you dig a hole and bury yourself and your father in law in carp.

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to Tim Vane
15th Jun 2019 21:36

sorry ..there IS an obligation to inform HMRC if you are in receipt of rental income over £2500...this would then presumably generate a request to file a return from HMRC...having not informed them in the first place , he has had no requests to file...so i suppose my question should be..what , if any,is the penalty for not having informed them of the income in the first place...thanks

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to systema56
15th Jun 2019 21:41

systema56 wrote:

sorry ..there IS an obligation to inform HMRC if you are in receipt of rental income over £2500...

Could you provide a statutory reference for that please?

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to Accountant A
15th Jun 2019 22:03

https://www.gov.uk/renting-out-a-property/paying-tax

Property you personally own

The first £1,000 of your income from property rental is tax-free. This is your ‘property allowance’.

Contact HMRC if your income from property rental is between £1,000 and £2,500 a year.

You must report it on a Self Assessment tax return if it’s:

£2,500 to £9,999 after allowable expenses
£10,000 or more before allowable expenses

If you do not usually send a tax return, you need to register by 5 October following the tax year you had rental income.

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to systema56
15th Jun 2019 22:16

systema56 wrote:

https://www.gov.uk/renting-out-a-property/paying-tax

Property you personally own

The first £1,000 of your income from property rental is tax-free. This is your ‘property allowance’.

Contact HMRC if your income from property rental is between £1,000 and £2,500 a year.

You must report it on a Self Assessment tax return if it’s:

£2,500 to £9,999 after allowable expenses
£10,000 or more before allowable expenses

If you do not usually send a tax return, you need to register by 5 October following the tax year you had rental income.

Two points ...

1. HMRC website doesn't count as "statutory".

2. There was no property allowance back in the mists of time, so this passage couldn't have applied even if it was statutory.

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to systema56
16th Jun 2019 12:00

systema56 wrote:

sorry ..there IS an obligation to inform HMRC if you are in receipt of rental income over £2500

That is utter rollocks. S7 TMA 1970 gives the obligation to notify but you are just quoting some bs that HMRC made up.

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15th Jun 2019 21:01

systema56 wrote:
believing wrongly, that since he had no tax liability he wasnt required to file returns

If you are confident that there is no tax liability then there is no requirement to file a return unless he received a notice to file.

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to bettybobbymeggie
15th Jun 2019 21:33

Thanks for the reply.. my understanding is that you are obliged to inform HMRC if you receive rental income of over £2500... this would then, I imagine, prompt them to send you a notice to file ( which if you ignored would then make you subject to the penalties for late filing)...since he never informed HMRC and therefore never had a request to file , I suppose my question should be.." what is the penalty ,if any, for not having informed them of the over £2500 rental income in the first place ?

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to systema56
15th Jun 2019 21:42

systema56 wrote:

my understanding is that you are obliged to inform HMRC if you receive rental income of over £2500...

Step 1: review your "understanding".

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15th Jun 2019 22:35

The guidance you are reading is rubbish I'm afraid. Unless you have received a notice to file or you have tax to pay there is no requirement to submit a return.

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16th Jun 2019 09:57

A little knowledge is a dangerous thing.

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16th Jun 2019 10:49

For future reference
If /when he sells the property - appoint an accountant to handle the CGT

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16th Jun 2019 11:31

Now 85 years old (is he getting younger?), no tax due, no loss to the exchequer....I know what I would (not) do.

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16th Jun 2019 12:53

@ systema56 (OP).

I fully understand your BELIEF (ie that your father-in-law has breached legislation and thereby exposed himself to Penalties). Such belief is founded on your CORRECT interpretation of the HMRC guidance.

HOWEVER, and crucially, the HMRC guidance is, both in relation to Rents up to and above £2,500, simply INCORRECT.

The purpose of the part of the legislation at issue is simply to ensure that taxpayers (and potential taxpayers) do not AVOID paying tax which they are liable to pay.

Hence, where no tax is payable, one is NOT obliged to notify HMRC of anything. Nor of course, logically, should there be any such obligation.

Other more eminent members above have made this same point.

I am of course taking entirely at face value your assurance that, for every tax year, the taxable income has been below the Allowances (both PA and, where relevant, AA). Out of interest, you may wish to indicate to us the nature of, and estimated figures for, the annual Net Rents for (say) 2010/11 (such figures are impliedly very low).

In short, and again on the basis that the taxable income has throughout been below the Allowances, you can put father-in-law’s mind entirely at rest that he has not breached the legislation.

Basil.

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17th Jun 2019 16:03

Per the link below:

“A self assessment is required even though the tax due may in fact be ‘nil’ (for example, in any case in which the taxpayer’s total chargeable income for the year is less than the personal allowances due for that year).”

https://www.gov.uk/hmrc-internal-manuals/self-assessment-legal-framework...

Under s 7 TMA 1970 anyone with a UK income tax liability (even if nil after the personal allowance as above) has to notify HMRC of that liability. Para 32 from the case below confirms this as follows:

“..The statutory obligation on every person is to notify liability if they are chargeable to tax and their income and gains do not fall within at least one of the exceptions in subsections (4) to (7) of s 7 TMA”

http://www.bailii.org/uk/cases/UKFTT/TC/2018/TC06320.html

The case in the link below is an exception (excuse) re s 8 TMA 1970 in case that’s relevant (it is almost certainly irrelevant to you unless HMRC have sent you a tax return to file (or a written notice to do so) and you have nil tax to pay).

http://www.bailii.org/uk/cases/UKFTT/TC/2017/TC06269.html

So, the short answer is that if your annual UK rental income after mortgage interest and other tax deductible property expenses resulted in a net rental profit you should have been filing UK income tax returns for the relevant periods.

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to Justin Bryant
17th Jun 2019 16:14

Justin Bryant wrote:

Per the link below:

“A self assessment is required even though the tax due may in fact be ‘nil’ (for example, in any case in which the taxpayer’s total chargeable income for the year is less than the personal allowances due for that year).”

Surely that means a Self Assessment OF TAX is required IF a return is made, not that a Self Assessment TAX RETURN is required even if the liability is nil.
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to Wanderer
17th Jun 2019 16:41

No. My above comments are re s7 TMA 1970 requirement to notify, which are prescriptive and exhaustive and your comments are irrelevant re that. If you still disagree, please explain why I am wrong specifically re that s7 requirement (and any case law thereto). (All this has been mentioned here before I think and makes sense as the PA has to be claimed in a tax return and is not automatic.)

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to Justin Bryant
17th Jun 2019 16:43

Yes! your whole premise is based on your link, but this is only relevant to when a return is made.
https://www.gov.uk/hmrc-internal-manuals/self-assessment-legal-framework...

hmrc wrote:
Section 9(1)

Taxpayers are required to include an assessment in their tax return showing the tax due for the tax year to which the return relates. This self assessment is based on the information contained in the tax return and will create a legal charge to tax.

Re your edit there are millions of people who get a PA every year without ever filling in a tax return!

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to Wanderer
17th Jun 2019 16:47

You have basically ignored what I said above re s7, so it's pointless arguing with you. Anyone else want to explain why I am wrong re s7 (without citing irrelevant garbage)?

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to Justin Bryant
17th Jun 2019 16:55

Okay, last try, Section 7 basically says:-

Under s 7 TMA 1970 anyone with a UK income tax liability .....

it doesn't add the words that you have:-
(even if nil after the personal allowance as above)
nor does Section 9.

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to Wanderer
18th Jun 2019 12:17

I think your interpretation of s7(7) may be too wide. I think a court would impose a narrower interpretation to the words "..could not become liable.." so as to exclude any claims for reliefs/allowances that must be made in the return when determining that phrase (since such claims can be rejected by HMRC). For example, it is often not a simple question as to whether certain non-UK resident people are entitled to a PA and a judge would not wish to have such an important exclusion dependent on someone's (possibly wrong) subjective view. A judge would however accept that if there are no net profits from that source then you are within s7(7) (as that is a pretty easy objective test). If you were right then I could arguably say, well, I have EIS shares, so I needn't worry about s7 and clearly that cannot be right. I will try find a case confirming that point.

[Edit] I cannot find a case, but this analysis is consistent with other taxes e.g. in SDLT, if you give me your £1m house on the condition that you give my daughter a £2m diamond and the further condition that she gives you a £2m oil painting, then there is no chargeable consideration (and no notifiable transaction therefore) as there is no profit overall. On the other hand, SDLT reliefs that reduce the chargeable consideration to nil always have to be claimed in an SDLT1.

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to Justin Bryant
17th Jun 2019 17:09

Justin Bryant wrote:

So, the short answer is that if your annual UK rental income after mortgage interest and other tax deductible property expenses resulted in a net rental profit you should have been filing UK income tax returns for the relevant periods.


However, if there truly is no liability in any year then there is potentially no penalty, as failure to notify is based on tax.

The £1,600 that the OP mentions presumes returns issued and not submitted on time. What we seem to have is a failure to notify (and no tax due).

If all figures were sent to HMRC through the LPC showing income and nil liability for all years, then one would hope HMRC would say "...and your point is? Please don't waste our time" and that would be the end of it for the past years.

Even if there were a liability for some years one would hope that under the LPC F-in-Law would get full credit for having come forward and any penalty (still tax based) would be substantially mitigated.

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to Paul D Utherone
17th Jun 2019 17:35

Yes; agreed (I made that same point recently in another thread, so I did not bother repeating it here).

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17th Jun 2019 17:06

To be fair Justin you answered your own question from the case you quoted: "The statutory obligation on every person is to notify liability if they are chargeable to tax".

This doesn't include 'nil', I'm afraid.

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to bettybobbymeggie
17th Jun 2019 17:55

I (and all judges) would obviously read and construe “chargeable to tax” in this context as meaning “is subject to a charge under or by reason of ITEPA 2003, ITA 2007 etc.” and not as meaning that “tax has in fact been charged and is due". Remember, s7 is a requirement to notify only and there may be no tax due due to a sideways loss relief claim etc., so your reading of that wording cannot be right (except possibly in the narrow case of there being no taxable profits from that source ignoring any relief claims etc.).

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to Justin Bryant
17th Jun 2019 18:37

I don't think HMRC agree:

Exceptions to the requirement to notify chargeability
Section 7(3) to (7)

There are exceptions to this requirement. These are where the taxpayer has no chargeable gains (or such gains as there are do not exceed the annual exempt amount), and either:

-has no net liability to income tax for the year, or
-has had sufficient tax deducted at source to meet the net income tax liability for the year.

https://www.gov.uk/hmrc-internal-manuals/self-assessment-legal-framework...

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to bettybobbymeggie
01st Jul 2019 17:48

Ignoring the CGT bit (which is irrelevant to the above discussion), this can be interpreted as agreeing 100% with my view i.e. s7(7) looks at the profits of each income source (before any claims for reliefs/allowances). Otherwise you are putting the cart before the horse here.

If you were right then a remittance basis user would not need to notify HMRC of their offshore unremitted income and that obviously isn't correct and is why the legislation has a £2k de minimis where no RB claim is needed (and in that case you would be correct and no s7 notice to file would be needed i.e. it's only automatic reliefs/allowances that do need to be claimed in a tax return that s7(7) takes account of and to say it automatically takes account of other claimable reliefs/allowances would result in a nonsense & circular interpretation that would not be upheld by any judge in my view).

Looking at this from the other extreme, if you had a 0% profit share partner in a partnership with £1bn profits, then (all else being equal) he would arguably not be within s7. See:

https://www.accountingweb.co.uk/any-answers/prospect-with-an-interesting...

I don't think there are any cases on this interesting s7(7) point - that I ashamedly implied was an uninteresting point in the link below:

https://www.accountingweb.co.uk/any-answers/chargeable-to-income-tax

Actually, it's not all that interesting since as pointed out above in practice there are (almost always) no adverse tax consequences in overlooking it re the average case covered by the PA (HMRC could have a 20 year DA period though).

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