Money matters......Self assessment

[sifly]

Bit naive here, need some assistance. Sorry if the question has been asked before.

I have not completed a self assessment form before as my main role if PAYE. However, as I now rent out a flat that I used to live in, I am aware that I need to sort this out pronto!

The flat is in both mine and my wife's names jointly. Is there a way of putting the income into my wife's name as she doesn't earn as much as me?

Also, I have a mate who rents out property but so far hasn't declared the income. the mortgage company is aware that the property is rented. Is there a way that he can inform the IR retrospectively without getting a big smack?

Or if he starts delaring from now on would that work?

Your assitance is greatly appreciated.

[Trenners]

Hi sifly,

Because the house is owned "jointly" then the income (and costs) are shared 50/50.

If you change your ownership to "tenants in common" (this is easy to achieve via a solicitor) then you can change the allocation of the asset via a trust deed (between your wife and yourself). So - your wife could enjoy 90% of the income and you enjoy 10% income. Costs would be shared in the same way.

I think that your friend should own up to the Inland Revenue and "take the smack". It is always better be honest ..... even more so when the tax man is involved !

Hope that helps

Mark

[plym77]

Hi Sifly

I would have to agree. I am a Chartered Tax Adviser and I would never advise anyone to try and 'hide past income'. Quite honestly, your frined is likely to be caught up with in the end - and the tax hit may not be as bad as he thinks, after taking into account the expenses of the property - mortgage interest, rates, repairs etc etc. At the end of the day, if he owns up now and makes a volunatry disclosure the IR are likely to be more lenient on him with regard to interest/penalties. However, if they catch him then they are likely to be harsher - it isnt worth it.

With regard to yourself, as mentions by Trenners you should prepare a 'Declaration of Trust' (solcitor will prepare) to transfer some of the capital to your wife. This would avoid changing the deeds but would mean that she can receive a higher level of the profits. This document cannot be retropective so until it is done you must split everything 50:50. The document can however be updated periodically which may take account of your or your wifes increase or drop in income.

One thing you should remember are the non tax issues. If you gift a futher share of the property to your wife, that is HER share, not yours. Your capital therefore being less. This doesnt bother alot of 'happy couples' but you should consider this just the same.

You need to inform the tax office of your requirement to prepare a self assessment tax return by 6 October following the year in which the income source commenced. However, in reality I have never seen anyone penalised for informing a bit late. You will then need to prepare a tax return (each of you) every year which will include all of your income that falls into that tax year (a tax year runs from 6 April to 5 April next) and the tax return must be submitted by 31 January following the end of the tax year.

I hope this helps

Plym77

[sifly]

Trenners, Plym77, thanks ever so much for your responses.

So a Declaration of Trust will enable my wife and I to split the Flat at a percentage of our choosing, that enables the majority of the income to be assigned to my wife (the lower earner).

I can see your point of that if my wife and I split, then she will still have that majority ownershp. Hopefully that will never happen, but then again, the way the courts rule in England when there are kids involved she'll get the flat anyway.....so it's worth getting the Declaration of Trust. Any ideas of approximate cost? £50 or £500?

To confirm the self assessment.

I started renting in mid April 06, so I would need to inform the Inland Rev of my requirement for a self assessment by 6th October 07. I then need to fill in the self-assessment by the 31st January 08, for the tax year 06/07.

With regards to my mate, I have let him know what you have said and I think he's going to give the IR a call - he's bricking it. What does he need to say? Will he need all his financial details to hand or will they send a form for him to fill in? He's been renting for just over 2 and a half years now and obviously is worried about the fine he'll incur. Will they ask him to complete self assessments for the years invloved?

Also, oes the IR have a list of things that can be used again the income like you said (interest, repairs etc)? Or would he need to see a tax advisor?

Sorry if I'm going over old ground.

Thanks for your help.

[plym77]

Hi

A Declaration of Trust over property must be done by a Solicitor - ordinarily this costs around a couple of hundred plus VAT. A Declaration of Trust will then automatically split your income 50:50 - if you want it to follow the capital split (say for example 80:20) then you will also need to complete a beneficial ownership form and submit this to IR.

Re your informing IR - If you started pre 5 April 2006 then you would need to inform them by 6 October 2006. You would report your income on a 2005/2006 tax return for the year ended 5 April 2006. If you didnt start until after 5 April 2006 then you are right, you would need to inform them by 6 October 2007 and report your profits for the year ended 5 April 2007 on a 2006/2007 tax return.

Re your friend - he is volunatrily disclosing so he should not be panicking. The wrist slapping will be minor and generally would come in the form of interest and possibly penalties - the penalties may belower as he has voluntarily disclosed the information.

He will need to prepare tax returns for each of the years in question, and he will need to disclose all forms of income (employment, pensions, etc etc) on the tax returns.

I would however suggest that rather than just providing all receipts to the IR to deal with' that he uses an accountant - accountants generally have good relationships with IR and so IR usually trust their judgement. Also, an accountant will be able to maximise any claim for expenses as they are much more experienced in this field than your friend - an accountant works for you, IR work for the Goverment. An accountant may also be able to argue a reduction in penalties, which someone without experience may have less luck (obviously it also depends on the inspector - and no reduction is guaranteed). Should your friend or you need an accountant/tax adviser, I can provide you with my contact details if you would like them.

There is a property manual on HMRC website, and there also used to be a bookless (IR150) although much of that is out of date now - I would suggest he uses a tax adviser/accountant.

I hope this information helps - and queries, please shout

Plym77

[plym77]

To clarify (as I think I did not make it clear in my last post) A Declaration of Trust is a legal document which will split the Capital in a specific way - ie. 80:20 for example. This will mean that the deeds do not need to be amended and broadly the original holder will 'hold on behalf of XXX'. Now that the capital is split, the income automatically splits 50:50 - it will not follow the capital ratio unless a form splitting the beneficial ownership (ie. the income) is also prepared.

I hope that is a little clearer....

Plym77

[sifly]

Thanks Plymm,

You've been a great help and a fountain of knowledge.

I think a visit to a solicitor is called for to help utilise my wife's lower income.

It would also be best for my mate to see a professional to help sort out his previous year's problems.

Thanks again.