Tax from the Trenches: “A happy ending…"

It’s nice to report a happy ending sometimes. I was all set up to start my article this month on the Let Property Campaign when I received an email on my personal hotmail account from Mr Greg Carson, Head of Customer operations at HMRC, telling me that I was entitled to a tax rebate of £787.80. Wow! I thought. What an idiot I must be, completing my tax return and calculating that I had something to pay on 31st January 2019 whereas all along, I was entitled to a repayment of tax. The email went on to tell me that HMRC would only communicate with me by email if I completed an email protocol, and it then invited me to click on the magic "hyper-link" box to start the repayment process. Suffice to say, I didn't click on the box, and as most of you reading this will know, HMRC would never contact anyone in this manner if they were entitled to a tax repayment. The email protocol section was a nice touch, taken word for word from HMRC's own instructions and guidance. The slightly dodgy email address from whence the email originated was also a bit of a giveaway.

But I digress, and my dodgy tax repayment is not the happy ending I was going to tell you about. Instead, the happy ending relates to a very recent client who had received a notification from HMRC about her being a landlord. It was a letter I have seen many times over the course of this year, where HMRC tell individuals they have good reason to believe they are, or have been, landlords and that they may need to report some rental profits and pay some tax. HMRC suggest using the Let Property Campaign, or to ring the campaign number if the recipient of the letter doesn't think that anything is due. There is a 30 day window to get the ball rolling and, from my experience, it is a good idea to get things moving quite quickly.

The lady, who we'll call Clare, spoke to me on the phone for about fifteen minutes and we scheduled a meeting at Raffingers' offices in Woodford Green, Essex for a few days later. Meetings like this are fairly standard in that it is my job to see if there's a tax issue and to advise on the best way to proceed. The meeting is free of charge and I always provide an all inclusive fee quote for preparing accounts, tax returns, capital gains calculations (if the rental property has been sold) and the disclosure to HMRC. I don't particularly want people to sign up on the spot as I think it is a good idea to shop around and be sure of the service they are receiving. The meeting with Clare started along normal lines as she started telling me about her background. She had been born and bred in Essex and lived at home with mum and dad until her late 20s. Mum and dad had never been in great health and it was with some guilt and trepidation that she finally moved away from the family home to take a well paid job in the Midlands. Mum and dad had been fully supportive and encouraged Clare to take the job but she always made sure she travelled home on weekends. Everything ticked along nicely for several years. Mum and Dad were ok, Clare found a boyfriend and she was promoted at work. She still came home every other weekend and life was rosy.

Then one December morning Clare's dad took a turn for the worse and within a matter of only a few weeks he was gone. It was completely unexpected and everyone was devastated. Clare, being an only child, felt completely torn living miles away from mum and still holding down an important job. She started worked insane hours cramming 5 days work into 3 or 4 days, and then travelling back to Essex as often as she could. Mum's health began to deteriorate and then Clare's boyfriend said that he wanted to end their relationship. Clare decided to resign from her job and come back home to live near mum. Unfortunately Clare could not find a buyer for her house so she approached a local letting agent who secured her a tenant. Clare moved back to Essex and has been living in rented accommodation near her mum for around five years. She took a job at a much lower salary than she had previously been on, but it has flexibility which allowed her to care for mum.

We spoke about the rental income and expenses for a while and I had a sneaking suspicion that any tax liability she might have would be minimal. She then told me that her house in the Midlands was in the process of being sold, but the solicitor had told her she might have capital gains tax to pay. Clare was in the process of asking me what I thought the capital gains tax might be when the flood-gates opened. Months or possibly years of stress, grief and guilt came pouring out. She tried telling me that she couldn't really afford very much in terms of rental tax or capital gains tax because of the difference in property prices. It took her a full 5 minutes to compose herself and I don't think I have been quite as moved in a client meeting as I was then. I decided then and there to put her mind at rest about the capital gains position. It was glaringly obvious to me, as it would have been to any tax professional, that no capital gains tax would be due. She had lived in the property for a long period of time and would therefore be entitled to Principle Private Residence Relief. She was also entitled to "Lettings Relief" which can be claimed when a house that used to be a private residence is subsequently let out. Clare had already told me the sale and purchase value of the house and I prepared a short capital gains calculation for her then and there to show, conclusively, that no capital gains tax would arise. I also told her that I didn't expect her tax liability to be particularly high because of her rental expenses and the claim she could make for wear and tear allowance in most years.

Clare signed up with Raffingers later that afternoon and, being an exceptionally organised person, she had her rental information over to me in a matter of days. All of the rental income and expenses were analysed in Microsoft Excel format and she sent me whatever supporting invoices she could find. I have to say that most disclosures I deal with involve client's summarising their rental details on pieces of paper and giving me the proverbial "shoe-box" full of invoices. I have no problem with this.

Some degree of guess-work is always needed, particularly when the rental goes back many years, and invariably some estimates are needed for expenses, as clearly no-one is going to have expense invoices dating back 5, 10 or 15 years. It's my job to make sure that any estimates used are reasonable, and also to make sure that the client has properly remembered all of their allowable rental costs. In this case Clare's expenses were pretty much full and complete and, within a few days of getting her details, I was able to tell Clare that she had a small tax liability in the current year ended 5th April 2018, but that we were well within time to register her for self assessment and complete a tax return by the electronic filing deadline on 31st January 2019. She was absolutely delighted as you might expect.

It doesn't always work out like this of course. Most of the time a "result" in a Let Property Campaign case is to prepare the accounts, calculate the tax interest and penalties, submit the disclosure to HMRC and have the figures agreed. This happens in 99% of cases and I've only ever seen one case where HMRC asked a few questions, and these were resolved quite quickly. In Clare's case the rental income for the house was pretty much on a par with her allowable expenses. She had also spent money getting the property into the right condition for letting at the very beginning which had created rental losses in the earliest years which are then carried forward to offset against rental profits in subsequent years as they arise. We are currently in the process of completing Clare's 2018 tax return to show her PAYE and rental income, and there will be a tax liability of around £250. We have also agreed to complete her 2019 tax return to show the PAYE and rental income together with details for the property disposal with no capital gains liability. We have also written a detailed letter to the HMRC Property Campaigns office explaining that no tax liability arises on any rental income prior to 2018. As I said at the start of the article, a happy ending indeed.

By Neill Staff

Tax Partner and Let Property Campaign Specialist

Neill Staff is our specialist tax partner. Contact him at  neill.staff@raffingers.co.uk or call him on 020 3146 1605. You can also follow him on LinkedIn.

Previous Blogs:

• Tax From the Trenches: “A little holiday home…”
• Tax From the Trenches: “I haven’t slept in two years”
• Tax from the Trenches: “The best and the worst of HMRC”
• Tax from the Trenches: “I got it wrong…he said”
• Tax from the Trenches: “How much does HMRC know?”