Big tax mistake - terrified

[metoatee]

We've made a terrible mistake and I'm terrified about what's going to happen.

In 2008 during the financial crisis, we were still stuck in our 1 bed flat with our toddler. We hadn't been able to sell but had to get out, it was so tiny that we had mould and damp issues from all the stuff crammed in there. We found a 2 bed flat to rent and left it.

After a while of still not being able to sell, in 2009 we took on tenants. DH tried to register for self assesment several times, but there were technical difficulties each time. He phoned the helpline, who then informed him that because there was nothing left over, he didn't need to do a return and they would just change his tax code. What I know realise is that they were probably assuming that he had an interest only mortgage, which he doesn't.

To make matters worse, looking at his salary, I'm not even sure they made any changes to his tax code. Finally this week, after all these years we have an offer on the flat. It is selling for £34,000 above what he paid for it and my research into capital gains tax has made me realise how bad things are. We were very naive and never wanted to be landlords, we did so out of desperation, but I fear that we have accidentally criminalised ourselves.

Not sure how to get out of this mess, how to approach HMRC or what we need to prepare ourselves for. Any advice welcome.

Contact HMRC and say you want to set up an SA record. Explain that you have only just realised you should have been paying tax on a previously owner occupied let property, refer to the helpline advice you received in the past and that you now believe that to be incorrect. There will be a record of you making that contact on your record.

Explain you need to complete SA returns online since 2009. These would have needed to be filed by Jan 2010 or Jan 2011 depending on dates.

You can then complete the returns. You can deduct all interest payments on the mortgage as well as fees relating to tenants, repairs, management fees etc.

Contact an accountant of you are unsure how to proceed.

Re the Capital Gains, a deduction is available if you used to live in the property yourself.

You will need to pay the tax, the interest and any penalty. The penalty will not be more than the tax and you will receive abatements which will make it much lower.

Much better to face up to it all now and get it sorted! Feel free to PM if you want to talk figures.

You need to look up everything properly on the HMRC website and possibly get proper paid for advice but i will tell you what I remember of being in a slightly similar situation a few years ago.

I owned a house and lived in it for a long time then I rented it out for a few years. The value changed a lot from the time I bought it to the time I sold it because it was over 20 years.

The time I was living in it didn't count for capital gains tax purposes. There was also something like a 3 year period at the end of the period of ownership that didn't count either even though it was rented out. There was also, I think, some allowance for the time it was rented out finally the capital gain had to be more than a certain amount to count so once I'd done all the sums I don't think I had anything to pay which surprised me a lot. I found the HMRC helpline very helpful but i know they are more difficult to get through to now due to staff cuts I imagine. You will need to speak to a technical specialist at HMRC and I think they will ring you back within a couple of days if there isn't one available when you call them.

Don't Panic

Yes, i think there's two issues:

1. The Cap Gains Tax. I'd be surprised if you had much to pay, esp if the house is in both your names as you both will have a tax-free allowance. You should be able to work out how much you will owe by looking at the calculator here.

1. The failure to declare the rental income. You need to come clean about this as Magnificent says. You've got a reasonable story about the advice from the helpline that they'd just change his tax code; you've now reviewed the situation when disposing of the asset and realised that advice may have been wrong.

Don't despair.

Look up the Let Property Campaign. Hmrc campaign to bring landlords up to date in their tax.

I have been a landlady since 2009 and have never paid any tax - due to dumbness, idleness, head stuck in sand-ness - and I am now in process of coming clean. It will be fine. Talk to them, they will help. If you "confess" rather than waiting till they come to you, you may not pay a fine, or only a small one.

OP
I'm a tax accountant

the most tax you can owe on the letting is on the difference between
the income
and the interst on the mortgage plus letting expenses and ovrheads
which can be astonishingly little

on the profit on sale its is the scaled profit after expenseseach allowing for the annual limit of £10000 that is taxable : ie not much

please do not panic

a few hours spent on a good adviser will make that tax bill shrink to triviality

Thanks very much to you all, I feel a bit better now. I think I will look for an accountant, just to be sure we don't balls it up again. Will the nearest local accountant be ok, or should it be someone who specialises in property?

Hopefully this sale will go through and we'll be well shot of the place!

Local accountant will be fine, it should all be straight forward.