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bigduckontax
bigduckontax, Accountant
Category: Tax
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Experience:  FCCA FCMA CGMA ACIS
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Hi My friend Michael, moved to Australia thirty years ago.

Customer Question

Hi
My friend Michael, moved to Australia thirty years ago. At the time a friend moved into Michael's flat and paid rent which Michael did not declare. Michael had a mortgage on the flat and at the time the rent was less than the mortgage.
Over the years the friend moved out and an agent put in tenants who paid a commercial rent. Michael did not declare this in the UK or in Australia. Michael never worked again in the UK so never filled in a tax form there.
Michael has always paid tax on earnings but the rent from the flat started as a loose arrangement but just kept going. What can he do to right the situation but given it has gone on for a long time he would not have full records or be in a position to pay 30 years of tax
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.
I regret that I have to agree with your observation that not much can be done. HMRC have the power to go back indefinitely to recover tax in England and Wales whilst in Scotland, for example, limitation legislation blocks them after 20 years. However I would submit to you the following points.
The rental at the reduced rate for his friend would be further diminished by the interest element of the mortgage plus the coast any maintenance wholly and exclusively incurred. Here is the Which list of possible deductions from rentals:
'Allowable expenses a landlord can claim
The most common types of expenses you can deduct are:
Water rates, council tax, gas and electricity
Maintenance and repairs to the property (but not improvements)
Contents insurance
Interest on a mortgage to buy the property
Costs of services, including the wages of gardeners and cleaners
Letting agents fees
Legal fees for lets of a year or less, or for renewing a lease of less than 50 years
Accountant’s fees
Rents, ground rents and service charges
Direct costs such as phone calls, stationery and advertising for new tenants
The expense should be incurred wholly and exclusively as a result of renting out your property.'
Taking all that into account there is a possibility that he has made a loss year by year, particularly whilst the letting was at a reduced rental. In that case such losses can be carried forward against future profits from the same activity. Furthermore as a British Citizen he would be entitled to his Personal Allowance, currently 10K, year by year to offset any profits after brought forward losses.
Here is the position from an Oz perspective as expressed by the Australian Taxation Office (ATO):
'Rental income from overseas property
Rental and other rental-related income is the full amount of rent and associated payments you receive or become entitled to when you rent out your property, regardless of whether it is paid to you or your agent. You must include your share of the full amount of rent you earn in your tax return.
If you receive associated payments in the form of goods and services, you will need to work out their monetary value.
Your rental income includes any assessable amounts you receive relating to limited recourse debt arrangements involving your rental property.
If you have paid tax in another country on your rental income, you can claim an Australian foreign income tax offset in your Australian tax return, which provides relief from double taxation.'
Whichever way one turns one is hit by Benjamin Franklin's famous dictum the in life there are but two certainties, death and taxes. In this case Michael is well and truly up the creek without a paddle. Tax men world wide seem extraordinarily keen on getting their money. So, what to do?
As I first step I would suggest that Michael submit a form P85 to HMRC. He probably did not do so three decades ago, but fortunately this can be sent in at any time and on line into the bargain. On receipt HMRC will classify him as non resident in the tax year following his departure date and split the year of leaving into two portions, one resident and one non resident. However, even as non resident for tax purposes his UK rental income is still subject to UK Income Tax, but I have shown you above how this might be mitigated or even eliminated.
What he should do now is wrap a wet towel round his head and assemble the backs of lots of envelopes to work out as best he can his UK and his Australian tax position year by year. The ATO have already indicated the effect of the Double Taxation Treaty between the UK and Australia in ensuring that the same income stream is not taxed by both jurisdictions. This is done by means of tax credits, the tax paid in one being allowable as an offset in the other country. Having done this he must then come clean to both HMRC and the ATO.
Now HMRC could and indeed might levy fines for non submission of tax returns and charge interest on unpaid taxes also. However, if there was in fact no tax due either through losses or the effect of the personal allowance then Michael might escape such penalties. This is essentially an UK taxation advice site so I have not gone into the possible attitude of the ATO for failure to declare.
All in all a bit of a gloomy situation, but I do hope I have shed some light and pointed a way forward for your friend.
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3109
Experience: FCCA FCMA CGMA ACIS
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Customer: replied 2 years ago.
Thanks, ***** ***** enen if it does conclude with one of the two certainties in life. Can I just confirm that interest on the mortgage would be deductible even though he purchased the flat originally as his home.
Once he comes clean and says he rented it out then will he be subject to Capital Gains Tax as it is not his dwelling or can he claim one place as your dwelling even if you do not live there. Australia does not have CGt so his house here presumably would not be an issue
Expert:  bigduckontax replied 2 years ago.

Yes, once let the mortgage interest would be allowable against the rental income. Indeed, in some of those far off days it was allowable against his income tax liability anyway, a concession finally abolished in 2000 by Gor***** ***** who described it as a 'middle class perk.'

As far as Capital Gains Tax (CGT) is concerned he has no liability as this does not kick in until he sold the property. As he is non resident of over five years it would be limited to any gain from a 6 April 2015 valuation. There is an Annual Exempt Amount, currently 11K, to offset any gain realized or possible Lettings Relief (up to 40K) instead. This would also be adjusted proportionately to cover the total ownership period and the let period less 18 months (when he is deemed to be in residence even if this is not the case). CGT is rather a complex area of taxation. I am aware that Oz does not have CGT, the gain being assessed as income, I believe.

Thank you for your support.

Customer: replied 2 years ago.
Sorry to come back again can I just clarify
1 He gets the 10k tax free limit even though he lives overseas because he is still a British citizen
2 if he pays no tax in the UK he will then get hit with full tax in Aus because he will have used his personal allowance as he works here If he is not got by one he will be got by the other
3 if he does nothing is he likely to be caught up with when he sells
4. He has taken a loan to purchase an extension to his lease. Is this deductible or is it a capital item
Expert:  bigduckontax replied 2 years ago.
Yes, as a British Citizen he always gets his Personal Allowance (PA).
Yes, it is pretty clear that he will be taxed in Australia even if he escapes tax in the UK through his PA as he will receive no tax credit.
Yes, HMRC will trample all over him. On sale the Valuation Agency (VA), a branch of HMRC, used to be the District Valuer, is always notified of a land transaction. Normally the VA deals with rating or council tax assessments or values for compulsory purchase and the like.
The loan is outside the scope of UK taxation, but any interest payable on the loan is allowable against the rental and indeed any income up to April 2000.
Customer: replied 2 years ago.
Thanks a lot for your help. I will certainly recommend your service
Expert:  bigduckontax replied 2 years ago.
Delighted to have been of assistance. After 30 years your friend must be quite used to walking upside down. My daughter lives in New Zealand and works for the NZ Government.
Expert:  bigduckontax replied 2 years ago.
Thank you so much for your additional support.
Customer: replied 2 years ago.
No problem. Do you see clients. Michael is going to be I the UK in June.
Expert:  bigduckontax replied 2 years ago.
Well I could, but I live in Scotland in the Borders.
Customer: replied 2 years ago.
Well in that case. Nice talking to you. Thanks again
Expert:  bigduckontax replied 2 years ago.
Not at all. My e address is
castell560
at
btinternet
dot
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