Help! Letter from tax office after selling my house!

[Ineedahouse]

I sold my old house to my brother in law who had lived in it for about a year beforehand. He was paying rent but slightly less than the mortgage then decided he wanted to buy it.

I've now had a letter from the tax office saying ive got 30 days to declare my income and 90 days to pay and its made me panic a bit! Thus was only meant to be a casual arrangement and was to do is both a favour so nothing was ever in writing or worked out for tax. I feel like im going to get a huge bill and tbe money i had put aside for my deposit on my next house is going to be swallowed up!

Please help me if anyone has been through this - what am I supposed to do and how do I work out the interest on tbe mortgage repayments? It says that these are deductable? He was only paying 400 a month and the mortgage was 420.

Im in rented myself amd was really hoping to buy very soon and get back into my own home. This isnt going to happen now i feel. My ex already wants half this money but the house was mine before i met him and he went to uni for 4 years of us being together - i paid all the bills.

Sorry for rambling- I went to voew anpther house today after losing out on one tbe other week and was hoping I cpuld male the fresh start I really need.

This has made me feel sick.

www.gov.uk/tax-sell-property

This may help

Did you use a solicitor?
How did your brother pay you?
Did you get a valuation?
Could X have spoken to a solitor for 'his' share?

I’m afraid these days what you pay in mortgage is utterly irrelevant to what you receive by way of rental income

It's obviously panicking you but I think you've been a bit naive thinking you could make 'casual' arrangements. Avoiding capital gains tax is severely frowned upon by the tax office. I think your best bet is to come clean - they would probably rather have their due (which you do have, even if it leaves you with less than you hoped) than prosecute you, hopefully.
Have a read of this www.gov.uk/capital-gains-tax
Good luck.

The tax return for income including for property is quite straightforward, read the accompanying guidance too.
I rented out my place and the income never incurred tax while i wasn't working. However once I was also working my income was over the threshold so I did have to pay a little bit of tax on the rental income. I wouldn't worry too much.

If you were making a loss then you shouldn’t have to pay tax. You may want to submit a return as a loss though as you will receive a tax rebate. Best thing to do is call hmrc and explain the situation.

Was the house a second home? In which case you are liable to pay capital gains. But you could offset the loss you made renting against this.

Don’t panic. Hmrc are in fact very nice and helpful! Don’t be afraid to call and find out your options x

(I'm assuming this is all to do with the rental income and the sale of your house is irrelevant? Or do you own another property? Did he pay stamp duty?)

Ignore rude health she hasnt a clue. If you are a taxpayer at 20 per cent you can deduct all of the interest payments for tax purposes, plus all other deductible expenses. These are letting agency costs, travel, electricity council tax during void periods, insurance etc. Once you've done the figures, you probably won't owe anything. Here is the link with info. Dont panic 🏠 www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

You should have been paying tax on rental income (some of which can be offset against mortgage payment now, though that's changing), and capital gains tax on the sale if the house went up in value.

It might have seemed like a casual arrangement to you, but HMRC will treat it as any other transaction.

You will likely have a large bill to pay. They might allow you a payment plan, but equally they might see this as deliberate evasion and whack you with a massive fine.

@Joe66

I am wrong. I was looking too far ahead.

But you are wrong too. It’s not “all”, as per below

The mortgage is irrelevant I'm afraid. The money you took in as rent will be classed as income and you'll owe tax on it. Sorry.

Speak to your solicitor who handled the sale. Is it the rental income that needs declaring or could the value have been liable to cgt if you had not lived in it for a while. If he paid £400 pcm the tax would be less than 1k even assuming you have no deductions (ie. Maintenance costs) to offset. Do you use your full tax free allowance against earnings or other income? However for 2017-18 tax year the deadline for filing a return is end October on paper or end Jan for online, so is not yet due.

So many ignorant answers here. The mortgage interest and any other relevant expenses (repairs, maintenance etc) are deductible from the income earned (tax accountant here)

Actually the amount of allowable interest is being phased out until interest is no longer a deduction in your tax comp. so not necessarily 100% deductible, dependent on what tax year this relates to.

First of all i would contact HMRC to fully understand what they are sending the letter about.

You should be filing a self assessment return and paying any tax owed for your rental income (less allowable expenses) and the online form is pretty self explanatory - helps you complete it and if you run into any problems, speak to an adviser at HMRC.

If the house was a second home, you may need to pay capital gains on any profits you made (e.g. if the amount you sold it for was greater than what you paid for it) and this may be what the letter is about, if the saw triggered a notification to HMRC.

But call them first and if you're really struggling with it, speak to a tax adviser - that will cost you money but will save you penalties and/or interest on tax owed.

*sale not saw.

Why on earth did you think you wouldn't have to pay tax on your DBros rent to you?

Its income. People pay tax on pay income and it's called income fucking tax for a reason.

See a solicitor or an accountant, or a financial adviser. The CAB will help you.

Two potential issues here; capital gains tax on the sale, and income tax on the rent.

It sounds like at one point your property was your principle private residence, was that the case? And if so when did you stop living in it? Did the sale take place at market value?

Turning to the rent; only mortgage interest is allowable in terms of the mortgage payment, and this is restricted for higher rate tax payers. Are you a higher rate taxpayer?

Mortgage interest is NOT 100% tax deductible. The tax law changed from 6.4.17 and you can only claim a percentage of the mortgage interest. There are calculators online that can help you work it out.

Your mortgage statements will show you the mortgage interest if you are on a repayment mortgage.

You can claim for buildings insurance and repairs, agency costs where applicable, admin, cleaning.

So your income is 12 x monthly rent ( if he was there a full year) less expenses = taxable profit.

Actually the amount of allowable interest is being phased out until interest is no longer a deduction in your tax comp. No it isnt, its restricted to basic rate tax. The tax relief that landlords of residential properties get for finance costs is being restricted to the basic rate of Income Tax. This is being phased in from 6 April 2017 and will be fully in place from 6 April 2020.

Tax is due on the rental income. By 'casual' arrangement, I'm assuming you didn't incur most of the expenses that LL can claim such as buildings insurance, gas safety test costs, etc!

Did he rent for the year that you mention or longer? If it's over two years then there might be an element of CGT to pay otherwise it's the rental income. Which is fairly easy to work out, you know how long he rented it for times £400 and you know your tax bracket.

Don't panic, just sort it out ASAP. HMRC aren't that bad, honestly. You'll feel better once it's out of the way.

@joe66... excellent, I thought I was losing it all, one good bit of news for those trying to retain assets for their probably non existent pensions!

Ok thanks for all the replies! I am not evading tax I was just a bit frightened by the letter and by casual I meant we had no rent book or formal agreement/contract.

He rented it for about a year definitely less than 2. I was trying to sell it before and have paid council tax whilst it was empty and also buildings insurance throughout (but not contents).

I feel slightly less panicked now thank you. I work full time so all my tax is dealt with by work - I find hmrc letters unnerving as I'm not used to getting them

I will get all the dates and mortgage interest figures together and put that in. Tbe sale of the house was about the same as I paid for it - it had actually decreased in value and it wasnt a second home - i lived there for over 12 years and was trying to sell it as had moved out of the area for work. It wasnt selling and bro inlaw wanted to rent it so it seemed a good idea at the time!!

You need to speak to an accountant, it sounds like there would be little if any rental profit to declare and highly unlikely there would be a cgt bill if you've lived in it and only rented for a year. HMRC will just have picked the transaction up from the land registry transaction and are checking all taxes have been paid. (I am a qualified accountant and tax adviser). A good accountant will put this to bed fairly quickly and easily for you.

Were you living in it prior to your brother moving in? If so, that should resolve any capital gains tax issues.

Assuming you're talking about the 17/18 tax year, you will have 75% of mortgage relief available. The other 25% will be available in full if you are not a higher rate tax payer. If you are a higher rate tax payer, it will be restricted to 20% tax credit - so essentially you won't get higher rate tax relief on this 25%.

Well worth you spending a small amount of time with a tax accountant. It should not cost much if you get all your info together beforehand. There are a number of exemptions and deduction for both rental income and CGT especially where you once lived in the house yourself and it sounds like you may well not need to pay anything but you need to have it all worked out in detail to justify it.

Don't forget that both your costs of purchase (including legal fees and stamp duty paid) can be deducted from any gain as can your costs of sale (legal costs and agents fees).

Did you declare rental income on a tax return? How would HMRC have known you were renting the property and receiving income unless someone told them?