UK Capital Gains Tax and Income Tax on rental property

[jcooper8090]

Hi,

I am after some advice please. I bought a property when I was quite young in 1999 for 27,300 (remortgaged some years later and currently have an interest only residential mortgage at 40K). During this time I have lived in the property on two long term occasions possibly totalling 4 years. The rest of the time I have rented the property out. Initially declaring with the mortgage company (who informed me they would contact the Inland Revenue - although after a follow-up phone call myself to IR I don't think I ever paid income tax). When I remortgaged I was living there and moved out again and when I asked in branch for a permission to let form the lady handed one over and when I gawked at the £150 admin fee she told me that "we would never know if you did rent it out". Needless to say, I never seeked permission and out of fear with the tax office I didn't declare either.

Now years later this whole situation has played heavily on my mind and only out of fear of backdated penalties prevent me from owning up.

I am now in a situation where the flat is empty and have two concerns.
1) Capital Gains Tax. I don't have any other mortgages and currently rent with my unmarried partner and two kids. The property I have mortgaged is a 1 bed flat so not realistic to 'move' back to that property. Is there any way someone involved in the process would know it was ever rented. As, if I admit - am I then setting myself up and openning a large can of nasty worms about undeclared income tax?

2) The current mortage is barclays best ever lifetime tracker and I reduced it to interest only when I tried to sell in 2008 - it fell through at last minute at its peak price and CGT was never in question then - even though I tried to sell it straight after I took vacant possession.

3) Is there any way of rectifying the situation as from now i.e. get a permission to let and declare this time round if I manage to let - would that wipe slate clean to past in terms of income tax and CGT if no-one ever knew?

4) I am a little confused by income tax on rental properties. You are charged income tax on the profit you make but what I need to understand is does this matter if your mortgage is on repayment or interest only? For example, interest only my profit is greater or is it? Do they take into account repayment as being taxable? What I'm trying to ask is, if I am declaring income tax would I be better of changing mortgage to a repayment or keeping it as interest only?

5) Interest only mortgage is £25 a month and realistic rental is approx. £365 - after expenditure of approx. £65 a month (including mortgage) and any add-ons through the year for repairs etc. how much am I likely to pay per month as income tax? As this is the big question that has always frightened me I am looking for some reassurance I can actually afford to keep it on and declare.

6) Would I ever go to prison if the inland revenue found out?

7) If I find a tenant in April 2013 - what happens in terms of timescale for advising inland revenue? Do I contact them straightaway and tell them and if so, would I have to start payment income tax or would that be calculated at the end of 2013?

8) Are you allowed to have a private tenancy where you mainly reside and own another and class it as a second home without paying income tax? If so, when you come to sell, do you have to pay CGT on a second home? Or is a second home only legally classesed as a second home when you have two residential mortgages?

A very stressed, confused individual who desperately wants to start doing things by the book without getting caught out for her past mistakes which I can ill afford. Housing market has dropped so much selling would, although potentially come away with £20K, it is a very crushing loss and with two kids under age of 3 I am at my most expensive time in my life.

Please offer any unbiased help please without any insults. Thank you in adnticipation.

 

[Truemanbrown]

I think you have good reason to worried. I would read this blog.

To go through your specific points

1) Capital Gains Tax. I don't have any other mortgages and currently rent with my unmarried partner and two kids. The property I have mortgaged is a 1 bed flat so not realistic to 'move' back to that property. Is there any way someone involved in the process would know it was ever rented. As, if I admit - am I then setting myself up and openning a large can of nasty worms about undeclared income tax?

You will not have to pay capital gains tax until you dispose of the property. However, because your property was your private principal residence then you will have no CGT liability for the period you reside in the property PLUS the last three years. You will also get Letting Relief from CGT.

If you read the blog that I have linked to, you can see how HMRC can gather information about lettings and other property transactions.

2) The current mortage is barclays best ever lifetime tracker and I reduced it to interest only when I tried to sell in 2008 - it fell through at last minute at its peak price and CGT was never in question then - even though I tried to sell it straight after I took vacant possession.

3) Is there any way of rectifying the situation as from now i.e. get a permission to let and declare this time round if I manage to let - would that wipe slate clean to past in terms of income tax and CGT if no-one ever knew?

I would get the information surrounding the income from letting out the property together with info about expenses and see what the scale of the tax payable would be. That way an accountant can determine how serious the problem is.

4) I am a little confused by income tax on rental properties. You are charged income tax on the profit you make but what I need to understand is does this matter if your mortgage is on repayment or interest only? For example, interest only my profit is greater or is it? Do they take into account repayment as being taxable? What I'm trying to ask is, if I am declaring income tax would I be better of changing mortgage to a repayment or keeping it as interest only?

You can only claim for the interest element of the mortgage repayment. You should receive an annual statement from the mortgage provider giving you this information.

5) Interest only mortgage is £25 a month and realistic rental is approx. £365 - after expenditure of approx. £65 a month (including mortgage) and any add-ons through the year for repairs etc. how much am I likely to pay per month as income tax? As this is the big question that has always frightened me I am looking for some reassurance I can actually afford to keep it on and declare.

Income Tax is not going to be massive. If you are a basic rate taxpayer you are looking at approx. £75 per month. If you are a higher rate taxpayer then we are talking at about £140 per month.

6) Would I ever go to prison if the inland revenue found out?

HMRC will prosecute if they deem the case to be serious tax evasion. Based on the facts above, I doubt they will deem your case to serious enough. If there is tax to pay then they probably charge penalties and interest on the tax not paid.

7) If I find a tenant in April 2013 - what happens in terms of timescale for advising inland revenue? Do I contact them straightaway and tell them and if so, would I have to start payment income tax or would that be calculated at the end of 2013?

You should contact HMRC straight away. If you started leasing out the property after 5 April 2013 your first tax return will be for 2013/14 due to be filed on or before 31st January 2015. Payment of the tax due will be 31st January 2015 as well.

8) Are you allowed to have a private tenancy where you mainly reside and own another and class it as a second home without paying income tax? If so, when you come to sell, do you have to pay CGT on a second home? Or is a second home only legally classesed as a second home when you have two residential mortgages?

if you reside in a property then it is your private principal residence and no CGT would be paid on the home. If you have two homes (e.g. one home could be a holiday home) then you must elect a private principal residence.

If you have a second home which is not your private principal residence then CGT will be payable when it is disposed of.

If you need any more assistance then send me a personal message.