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Self-assessment

Self-assessment

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Hi all,

Could anyone help with the following scenario please?

Background:

Couple let 2nd property, net income less than £2,500. She earns less than personal allowance (including property profit). He earns at basic rate under PAYE (inclusive again).

1. Do they need to register for self-assessment? Or can they complete P810?

2. As she is under PA can she avoid registration at all?

Many thanks

Replies (12)

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Euan's picture
By Euan MacLennan
02nd Sep 2011 12:45

Self-assessment

As the husband will be liable to basic rate tax on 50% of the net rental income, he must notify HMRC of his chargeability to tax by 5th October following the end of the tax year in which the income first arose.  HMRC will issue a SA tax return for completion.

As the wife's total income this year is covered by the personal tax-free allowance, she does not have to notify or complete a SA return, but review the situation each year in future.

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Replying to mikefrancis:
By The Doctor
02nd Sep 2011 13:31

Thanks Euan - much appreciated.

If the year 1 of the rental is in fact a loss, can I avoid declaring this to HMRC until year 2 when there is a profit?

Thanks.

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By emmaburrows
02nd Sep 2011 13:39

SA Criteria

Both will have to notify HMRC of their income but a self assessment return is only due where their share of the gross rents exceed £10,000 OR the profit exceeds £2500 in accordance with the HMRC self assessment criteria.

Thanks (1)
Euan's picture
By Euan MacLennan
02nd Sep 2011 14:56

The HMRC guidance is wrong

Beware of believing HMRC guidance.  The law is set out in s.7 TMA 1970, as amended, which reads:

"(1) Every person who -

  (a) is chargeable to income tax or capital gains tax for any year of assessment, and

  (b) who has not received a notice ... requiring a return for that year of his total income and chargeable gains,

shall, ..., within six months from the end of that year, give notice to an officer of the Board that he is so chargeable."

So, you only have to give notice if you have tax to pay.  There is no legal requirement to give notice and hence, file a tax return, if your gross income exceeds £10,000 or if your profits exceed £2,500, but your total income is within the personal tax free allowance.  And there is no exemption from the requirement to notify if your profits are less than £2,500, but you have other income which together with the rental profits adds up to a total of more than the tax-free personal allowance.

To answer the Doctor's follow-up question, there is no legal requirement to notify for a year in which there is a loss.  You can claim for losses brought forward in the first year that there is a taxable profit from the letting property.

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By emmaburrows
02nd Sep 2011 15:07

From HMRC SA criteria....
Income above a certain level from savings, investment or property

If you don't already complete a tax return, you'll need to do so if you receive any of the following:

£10,000 or more income from savings and investments£2,500 or more income from untaxed savings and investments£10,000 or more income from property (before deducting allowable expenses)£2,500 or more income from property (after deducting allowable expenses)annual trust or settlement income on which tax is still due (even if you’re only treated as receiving this income)income from the estate of a deceased person on which tax is still due

I personally would always advise a client to make HMRC aware annually of the fact that they are receiving rental income regardless of whether they meet the criteria for SA especially where a loss is made as it stops the inevitable queries once the losses are claimed.  Agreed that there is no requirement to file a return unless the individual meets the criteria although you will see that the criteria listed above makes no mention of the amounts being below the PA. 

Thanks (1)
Euan's picture
By Euan MacLennan
02nd Sep 2011 15:48

I have said it before and I will say it again

The HMRC guidance which you are quoting is mostly wrong and thoroughly misleading to members of the public and apparently to some accountants.

If you don't already complete a tax return, you'll need to do so if you receive any of the following:

£10,000 or more income from savings and investments - WRONG unless total income puts you into the higher rate tax band£2,500 or more income from untaxed savings and investments - MISLEADING, because you would still need to notify if you had any such income below £2,500, unless your total income was covered by your personal allowance£10,000 or more income from property (before deducting allowable expenses) - WRONG because the gross rental income is irrelevant£2,500 or more income from property (after deducting allowable expenses) - MISLEADING, because you would still need to notify if you had any such income below £2,500, unless your total income was covered by your personal allowanceannual trust or settlement income on which tax is still due (even if you’re only treated as receiving this income) - TRUE since tax is dueincome from the estate of a deceased person on which tax is still due - TRUE since tax is due

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By nogammonsinanundoubledgame
05th Sep 2011 10:13

And there's more ...

From Euan's link, if you scroll up to the previous paragraph on HMRC site it advises that you *must* complete an SA return if you are a company director (subject to some specified exceptions).  WRONG.  S.7 TMA makes no reference to officers of companies as a criterion for notification.  (It goes without saying, I think, that you must complete one if served with a notice to do so, whatever the income to be declared and whatever the tax consequences).

It beggars belief that so many accountants who should no better are willing to take on trust the guidance issued by HMRC.  This comes up so regularly on AWeb.

With kind regards

Clint Westwood

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By thisistibi
05th Sep 2011 12:00

Gap between theory & practice

I think it's a little harsh to say that the HMRC guidance on that link is wrong and misleading.  What is outlined is HMRC practice on the matter, which is more generous than the strict position outlined in law.  My understanding is that they don't want taxpayers signing up for self-assessment unless they are actually making money out of it - the cost for HMRC of processing a tax return is significant. 

There are many higher rate PAYE taxpayers who receive a small amount of bank interest taxed at only 20% who should strictly file a tax return and pay tax at 40% on that interest; HMRC practice is that they don't really care unless amounts are significant.

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Euan's picture
By Euan MacLennan
05th Sep 2011 12:26

@thisistibi

It's not a gap between theory and practice - it's a gap between the law and practice.

Whilst I take your cost/benefit point, the tax loss on not being required to report up to £2,500 of untaxed savings or property income is up to £500 a year for a basic rate taxpayer and £1,000 for a higher rate taxpayer.  That is a frighteningly high de minimis in the current state of the economy.

And not disclosing up to £10,000 of taxed savings income is £2,000 for a higher rate taxpayer, although I suppose they get the interest information from the banks and building societies and can issue P800 tax calculations for employees.

The £10,000 exemption for gross rental income is completely and utterly WRONG - you are taxed on the net rental income, not the gross.

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By thisistibi
05th Sep 2011 13:30

@Euan

Not wanting to stray too far off-topic, but I think the "de minimis" is an unfortunate compromise caused by the faliure to increase the HR threshold in line with salary inflation.  The UK tax system is designed to correctly deduct BR tax from employment income, savings income and dividend income without a tax return being required for all except HR taxpayers. 

Putting ever increasing numbers of individuals into the HR band undermines this clever tax system and causes an administrative nightmare for HMRC - after all, they have an obligation to check the tax returns that are filed, and chase debts, etc - not just process the tax return itself.

My view is that £1,000 of tax is NOT that significant if you consider that many individuals shouldn't really be in the HR band in the first place - not if the system was used as it was designed to be used.  In my view HMRC are starting to abuse the PAYE system by trying to collect tax on bank interest, etc, through PAYE coding.  Now we've got to a point where HMRC have too many HR taxpayers to cope with, maybe the whole tax system needs an overhaul.

In the meantime, UK gov should legislate the de minimus rule to align law with practice.

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By nogammonsinanundoubledgame
05th Sep 2011 17:50

@thisistibi

Applying a de minimis limit might not have been entirely unreasonable or unfair (you can argue the point based on nation's finances etc), except that those who are in the SA "net" and whose net rental income is (say) £2490 do not get the choice to opt out.

In any case I am unconvinced that HMRC would not serve notices under s.8 if they got wind of the rental income, even if it is below £2500.  You might stand a chance at escaping penalties, but they could still issue discovery assessments going back a few years.

With kind regards

Clint Westwood

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By androo
07th Jan 2013 14:42

I'm sorry (I think) for resurrecting this thread, but everyone seemed to be missing a fundamental part of HMRC's website when quoting the conditions under which an individual should complete a SA. Viz:

 

If you don't pay tax through a PAYE code you’ll need to complete a tax return if all of the following apply:

you have income to declare, for example income from savings, trusts or abroad, rental income from land or propertyyour total income exceeds your total allowances and reliefsyou have tax to pay on this income

Note the 'all' the following apply. So, as Euan says, you only have to do a SA if you have tax to pay. 

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