Thanks for your answer - I have been picked out randomly for a tax investigation and the tax inspector has picked up on one issue.
I bought my first house in 1998 for the sum of £42,500. I lived in it until May 2007 when I then released equity from it - in the form of a loan from my Mother - to buy the place I currently live in and rented out the first place.
I then took out a 'proper' mortgage in 2010 and paid back the vast majority of money to my Mother - £6,700 still outstanding.
I have been paying Mother interest on the loan and claiming tax relief on this interest.
Mother was not aware she needed to declare the money she received from me (the interest payments).
The tax inspector is investigating the year 2011/2012.
Thanks for your response and the additional information
Yes mum should have declared the interest she was receiving as this additional income (over and above the loan repayment) would not have had any tax deducted from it - as not paid by bank or building society (who deduct the tax at source prior to the interest payment)
However at this stage its you HMRC are investigating - and you have claimed the interest as an allowable expense - I assume from rental income, that you received from this property from 2007 - so your tax affairs would seem to be in order. with no further concerns from HMRC, is this not the case?
Its just a question of your mother now making sure she makes a full declaration of the interest received - so this can be considered for tax purposes, because if this interest, along with any other income she has each year, is in excess of her personal tax free allowances, then tax will be due on the interest received.
Let me know if I can be of any further assistance. Thanks Sam
Yes, you are correct, the interest was claimed as an allowable expense against the rental income. I believe my affairs are in order, but I am concerned that they may want to investigate my mother as part of this investigation. I am currently paying her interest of just £29 a month but when I first took out the loan, this amount was higher as the loan was higher.
My mother is very elderly and doesn't understand about tax issues.
Thank-you so much for your advice, much appreciated. I will speak to mother and endeavour to do as you suggest.
May I ask another tax question - I am the director and sole shareholder of a small limited company (also subject to the same tax investigation).
I have an office at home (I have a four bedroomed house, plus living room and dining room) and use two of these rooms for business use) and since I became a limited company, again in 2007, I have been offsetting two sixths of my utility bills, mortgage interest and council tax against the tax bill.
(The company renting office space in my home).
The tax inspector is saying this is incorrect and I should be claiming for use of the space as an employee which is a lesser amount, rather than as the company. Is this correct?