Offshore matters or transfers, disclosure for UK tax and the new failure to correct penalty from 1 October 2018

Following my blog "UK tax compliance and HMRC Campaigns", I am focusing here on offshore involvements and UK tax. 

If you have, or have had involvements offshore, are you happy that these affairs have been correctly disclosed and taxed in the UK?

There is a new legal requirement included at Section 67 and Schedule 18 of the Finance (No. 2) Act 2017 that creates an obligation for anyone who has undeclared UK tax liabilities involving offshore matters or transfers to disclose the relevant information about this non-compliance to HM Revenue and Customs (HMRC) by 30 September 2018.

Failure to disclose the relevant information to HMRC on or before 30 September 2018 will result in the person becoming liable to a new penalty as a result of their failure to correct (FTC). The new FTC penalty is likely to be much higher than the existing penalties, with a minimum penalty of 100% of the tax involved.

To avoid becoming liable to these new higher penalties, a person must correct the position by no later than 30 September 2018. If they do this, the tax and interest will be collected and the existing penalty rules will apply.

HMRC has previously run campaigns specifically aimed at tax payers with overseas affairs who may not have made correct disclosure and/or paid enough tax in the UK. These campaigns are now over, but anybody wanting to make a tax disclosure voluntarily about any area of UK tax can still make a disclosure by using the Campaign Voluntary Disclosure Helpline on 0300 123 1078 - Monday to Friday, 8 am to 6:30 pm.

If taxpayers are unsure whether they have undeclared UK tax liabilities that involve offshore matters or transfers, they should check their affairs and if necessary put things right before they become liable to the new FTC penalties that will come into force on 1 October 2018.

Further guidance on this is available from HMRC here

Rental income on residential property (Buy to let) - an update

Since writing the original blog on rental income, there have been a couple of significant changes.

The first relates to the wear and tear allowance. This change takes effect from April 2016 so we are just at the end of the first tax year affected by this change.

Under the old system, landlords with furnished property could make a deduction of 10% ( possibly with a few small adjustments) of their rental income in calculating the taxable profit.

This will affect all residential landlords whether personal or corporate.

Under the new rules, the costs actually incurred on replacements will be an allowable deduction

A complication arises where the replacement is not like-for-like (or the nearest modern equivalent) since the cost of any improvement is not an allowable deduction.

The second change relates to the deduction of finance costs (for example, mortgage interest) in arriving at taxable profits. This deduction would have caused tax relief at the top rate of tax being paid by an individual, often at 40% or even 45%. Restriction of this relief will now be phased in from April 2017 with 25% of the finance costs only achieving basic rate tax relief. This basic rate element will increase to 50% in 2018/19, 75% in 2019/20 and will be entirely at basic rate only from 2020/21.

The effect of this change is that from 2020/2021, all taxpayers with rental income, whether personal or corporate, will receive the same tax relief (20%) on their finance costs, regardless of their tax rate.

The structure of holdings of residential, rental property should be reviewed in 2017/18 for existing holdings and as new acquisitions are planned going forwards.

Good advice should consider the situation on a case by case basis because there are other factors, including other taxes to consider.

Partners who together own rental property and are not married can agree to how any taxable income should be split. However this is not so straight forward when the partners are married.

Married couples often own property as joint owners. This means that they jointly own the entire property in equally shares. The split of any rental income is 50:50. It should also be noted that in this situation, where one spouse dies their share in the property goes to the surviving spouse and can not be treated otherwise by the will.

The alternative is to hold the property as tenants in common. This allows distinct shares in the property, which need not be equal. It also allows the will to determine what will happen to the share property in the event of death.

Where the percentages of beneficial ownership between husband and wife are formally amended, HM Revenue & Customs must be notified within 60 days by lodging Form 17 ("Declaration of beneficial interests in joint property income").