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bigduckontax
bigduckontax, Accountant
Category: Tax
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I bought a house in 2010 and spent money doing it up as I thought

Customer Question

I bought a house in 2010 and spent money doing it up as I thought I was going to live there for a few years. then mid 2012 I had to move and decided to rent the house out. I have a btl mortgage and an agent who deals with the letting of it. my issue is that I have not paid any tax on the rent received which I now realise I should have done. How easy is this to get resolved and pay whatever I owe? I would also like to know how best I can offset some of this tax against whatever allowances I can. I have a job which I am in the 40% tax bracket. thanks
Submitted: 7 months ago.
Category: Tax
Expert:  bigduckontax replied 7 months ago.
Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question. Firstly, the interest element of the mortgage only can be used to offset rentals. Here is Which's excellent summary of the most common deductions you can make from rentals: 'The most common types of expenses you can deduct are:water rates, council tax, gas and electricitymaintenance and repairs to the property (but not improvements)contents insuranceinterest on a mortgage to buy the propertycosts of services, including the wages of gardeners and cleaners (as part of the rental agreement)letting agents' feeslegal fees for lets of a year or less, or for renewing a lease of less than 50 yearsaccountant’s feesrents, ground rents and service chargesdirect costs such as phone calls, stationery and advertising for new tenantsThe expense should be incurred wholly and exclusively as a result of renting out your property.' What you need to do now is calculate for each tax year the net rentals which have not been declared for tax and go cap in hand to HMRC and throw yourself at their mercy. Unfortunately that commodity is in short supply in that Department! HMRC can charge interest on unpaid tax, only fair, they pay interest on over paid tax. If you come clean to them they may be lenient regarding penalties. Remember if you make a loss on property rentals in any one tax year then it can only be used to offset profits in subsequent years. The moneys spent on doing up the property is not allowable against rentals, but inflates the acquisition price for Capital Gains Tax (CGT) in the longer term and will reduce the gain subject to CGT. I do hope that you find my reply of assistance.
Customer: replied 7 months ago.
thanks for the response....
What sort of penalties could I be looking at if they were not lenient?
Also, I have read that I can also offset 10% of the profits for wear and tear... I have rented the property without furniture but it does have all kitchen white goods and gardening equipment supplied.
Are the tax rules the same for the last 4 years? is it simply I just need to pay 40% of the profits to the HMRC?
and lastly how do I actually go about starting all this off... just ring them up or download a form off their website?
thanks
Expert:  bigduckontax replied 7 months ago.
You are correct in your surmise of 10% wear and tear, but that concession is in the process of being terminated in favour of actual expenditure. It is likely that any net profits will be subject to taxation at your marginal rate of tax ie 40%. I would advise getting the ball rolling by writing a grovelling letter to your tax office. Please be so kind as to rate me before you leave the just Answer site.
Customer: replied 7 months ago.
Thanks, I'll send a grovelling letter to my local tax office asap. Should I put all the figures in the letter and work out roughly what I think I owe them?
You mentioned Capital Gains Tax on the property... would this be tax on the increased value of the property from when I started renting it out, rather than when I bought it? if so, would I have to prove its value at the time I rented it out?
There is a chance that I may end up moving back into the property in a couple of years time... if I did that and stayed there for a period of time, would I still have to pay CGT?
thanks
Expert:  bigduckontax replied 7 months ago.
Yes, that would be an excellent isea, shows willing. CGT would be calculated on the gain from when you bought it, but you would be entitled to private Residence Relief (PRR) for the proportion of the time you occupied it as your sole or main domestic residence. There would be no requirement for a valuation as at renting out as the gain is deemed to accrue evenly by time not following reality! If you moved back, yes you would, but the proportion of the gain exposed to tax would, of course, reduce and you would have your non cumulative Annual Exempt Amount (AEA) of 11.1K and Lettings Relief (LR) up to 40K to offset the gain.
Customer: replied 7 months ago.
I see, a lot different to how I expected the CGT to be worked out... It sounds like I may end up losing out there because I spent about £40,000 doing the house up which was all done when I first bought the house and whilst I lived there and I dont have reciepts for most of it as I wasnt expecting to need them as I didnt know I would be leaving 2 years later... and thus I'm guessing it will be very difficult for me to off-set these costs against the property value increase?
thanks for youre help. before signing off, is there anything else you can recommend that I should put into the letter to the HMRC that can help me with them in either reducing any fines, or off-setting any other deductions to reduce the tax owed?
Darren
Expert:  bigduckontax replied 7 months ago.
There is a danger here that HMRC would regard this as deferred maintenance and not allowable as part of the acquisition price unless the repairs constritued improvements as I mentioned. Just be absolutely honest and HMRC may, and I only say may. not impose fines particularly if the revenue lost is small or even non existent. Please be so kind as to rate me before you leave the Just Answer site.

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