Undeclared Property Rental Income

by **Timaus** on Sat Oct 15, 2011 8:43 pm

Hi,

I am a Trainee Management Accountant (wrong sort, as I am studying CIMA) and recently a friend has come to me for some advice, but my limited knowledge means I cannot help further, so need some advice.

My friends father purchased a house in 1991 on an interest only mortgage plan, which was only recently finished being paid off in late 2010. My friends father was the landlord, and rented the house to his sister and her husband, who became tenants. In 1999, my friends father ceased to become the owner of house, and transferred ownership into a bare trust, where 5 trustees, (friend and his siblings) all became owners of the house, and his father stayed as a trustor. The friend and his siblings were all kids when this happened. In 1999, my friends father, on the advice of his accountant, stopped paying tax on his rental income (friends father is not very knowledgeable in this area, is totally confused by it, and was/is very naive). Tax has not been paid for 12 years but im under the understanding this is now liable to all the trustees - of which 2 were very young, and only just started work in the last year and a half, paying a basic tax, and the other 3 have all been working since 2002, 2003 and 2004 and have subsequently been paying basic then higher tax rates in their lines of employment.

Since I know alot about their history of transactions with the house, they have only just finished paying off the mortgage in the last year, there has been little to no profit as rent has gone straight to the profit, and there have been other things like insurance and repairs/renovations.

Also, there is a problem as the friends fathers paperwork is in poor condition, with receipts, bank statements missing, and I have gone through it but do not know where to start.

What advice can I give them? What are HMRC's penalities likely to be and how much would like be paid back?

rental per month: 660
tax period (non paid): 05/99 - 09/11
mortgage interest payment: around 3500 annually

Regards,

Tim

by **section 44** on Mon Oct 17, 2011 2:41 pm

You should clarify what happened to the property with regards to legal and beneficial ownership. What you have written does not make sense and appears to be wrong.

Timaus wrote: im under the understanding this is now liable to all the trustees - of which 2 were very young

By "very young" do you mean a minor? A minor cannot legally own real property. Accordingly a minor cannot be a trustee.

Timaus wrote:his father stayed as a trustor

What's a trustor? A trustee, a settlor or something else?

by **RAL** on Mon Oct 17, 2011 4:03 pm

Tim

Are you doing this for fee or free? If for a fee, please check CIMA's rules, and MLR.

by **Tax Champion** on Wed Oct 19, 2011 9:22 am

This may be a misunderstanding, but it sounds as if the property was placed into a bare trust for the five siblings, the father being trustee (not trustor). If that is correct, each beneficiary (not trustee) would have a one-fifth share of the income, but as they were minors, presumably with little or no other income, there would have been no tax liability, hence the advice to the father to pay no further tax.

If the situation is different, there could indeed be unpaid tax for earlier years.

by **section 44** on Wed Oct 19, 2011 9:50 am

Tax Champion wrote:but as they were minors, presumably with little or no other income, there would have been no tax liability,

But if they were minors and the settlor was their father, wouldn't the income be taxable on him?

by **wamstax** on Fri Nov 11, 2011 12:47 pm

Hi there I think your friend's father should think about his next tax return (and any others that he made in the past) in the light of the following link http://www.hmrc.gov.uk/trusts/types/minors.htm

Clearly he was still liable on any letting profits while any of his children were minors and profits were arising for their benefit

by **wamstax** on Fri Nov 11, 2011 12:53 pm

If he has understated "his" income in the past then the sooner that he corrects the issue with HMRC the better. Clearly in these days of HMRC tracking and tackling special businesses and trades (e.g. letting landlords and restauranters or Scottish Scrap Metal dealers) it might be best to go forward to them (assuming of course that there is a taxable profit in the first place) before they come a knocking.

Inevitably if there has been tax lost then HMRC may well be after not only the tax and interest but also a penalty and going forward early (or before they catch you) can reduce the latter. Also feel free to give me a call or contact if you would like to have a short chat over the problem. Tax investigation specialist experience can invariably reduce the HMRC demands and it may well be relevant that your friend's father acted on the advice of a professional.