I think our accountant may have messed up

by Readers Question

8:25 AM, 6th March 2017
About 2 years ago

I think our accountant may have messed up

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I think our accountant may have messed up

I have been reading your Landlord Tax Tutorials with great interest since the beginning of this year. The penny dropped for me in one of the latest articles and I think my accountants negligence has resulted in my husband and I paying £5,000 a year more in tax than we needed to. I would be most grateful if you would let me know whether I have understood this correctly. I think our accountant may have messed up

The background is that we had twins just over three years ago. I pay the additional rate of tax at 45% whereas my husband has been the stay-at-home parent. This made financial sense as I was by far the higher earner.

Our rental properties are owned jointly and produce £40,000 a year of rental profits.

My husband has no other source of income.

Our accountants have been submitting self-assessment returns on the basis that we share these profits equally, i.e. £20,000 each.

This resulted in my husband paying £1,800 of tax on his share of the rental income this year, after taking into account his personal allowances.

On the other hand, I paid £9,000 of tax on my £20,000 share of rental profits due to the 45% tax rate.

On reading your tax tutorials it occurred to me that our accountants should have advised us to form a partnership and to allocate 100% of the profit to my husband. He would have paid tax on the other £20,000 at the 20% tax rate, i.e. £4,000. This is £5,000 less than I paid.

Do you agree with my numbers?

I have sent an email to my accountant this weekend and await his response. Meanwhile I am contemplating what to do about this.

Any further thoughts please?

Thank you.

Penny



Comments

Mark Alexander

8:37 AM, 6th March 2017
About 2 years ago

Hi Penny

Yes I concur with your logic and your numbers entirely.

I come across this a lot. It seems to be a classic case of accountants taking a two-dimensional approach to accounting for the facts presented before them.

There are two things your accountant could have done. The first is to allocate him a salary of the entire £40,000 of profit for running the business. The second would have been to register the rental property business as a partnership and then to allocate the entire profits to your husband.

The latter of these options is preferable if there is any ever chance of your incorporating your business. This is because incorporation reliefs exist to offset CGT and SDLT due on transfers of partnership assets into a limited company in exchange for shares in the company.

What you haven't said is whether you have mortgages on any of these properties, how many rental properties you own and whether or not you intend to buy any more. This is all extremely important for future planning purposes.

Please consider booking a private consultation with me and note that I offer a total satisfaction or full refund guarantee >>> https://www.property118.com/optimal-tax-planning/91857/
.

Paul Mullally

11:12 AM, 6th March 2017
About 2 years ago

Hi Penny,
Your accountant has been providing you with accountancy services but not Financial Planning advice. Unless you're on top of your household income and are reasonably well read, you'd be better to pay a specialist to provide these services.

I have had these issues/complaints for years but until I took ownership of it myself and then started to ask the right questions, did I really see the major benefits in terms of taxation. I have since changed accountants and pay for an independent and specialist Tax Advisor.

You'll get nowhere complaining to your accountant, so just suck it up and move on.

Good luck....Paul.

Puzzler

11:42 AM, 6th March 2017
About 2 years ago

Would not HMRC question whether £40k salary is commensurate with the work involved?

Mark Alexander

11:48 AM, 6th March 2017
About 2 years ago

Reply to the comment left by "Puzzler " at "06/03/2017 - 11:42":

They might try, but it is highly unlikely.

Penny is clearly a career woman and her husband has far more time to manage the property rental business. There is no law on in terms of the maximum amount a person can be paid either.
.

Rob Crawford

19:40 PM, 6th March 2017
About 2 years ago

Hi Penny, whether you have a case against your accountant will depend on what service you agreed he would provide you. At least you now have a way forward and this could be confirmed in more detail and on a personal basis if you take up Mark's offer. Mark's recommendations would provide a means from which you and your accountant can work.

Penny -

20:29 PM, 6th March 2017
About 2 years ago

Thank you all for your advice.

I booked a consultation with Mark this afternoon, heard back from him within a couple of hours and am now in the process of gathering all the information he has requested.

Martin Wardle

11:46 AM, 8th March 2017
About 2 years ago

Penny

Whilst you can pay your husband what you want, and he will be taxed on it, to claim a deduction it must be at a commercial rate. This is one of the basic rules of deduction.

You are very unlikely to be a partnership if all you provide is rental. You no doubt have a joint investment.

You could however consider the use of a very basic Form 17 in conjunction with a declaration of trust depending on the exact nature of ownership and where the funds came from etc. Can only be backdated 30 days from signature but do it before 6 April and at least you'll be set for the upcoming tax year.

Take care not to do anything based on forum responses... including mine! Do a fact find with a Chartered Tax Adviser, they will get the rest of the information they need to be able to help.

On suing your accountant?! Very hard but not impossible. Depends if you have engaged them for TAX ADVICE!

Mark Alexander

11:56 AM, 8th March 2017
About 2 years ago

Reply to the comment left by "Martin Wardle" at "08/03/2017 - 11:46":

Hi Martin

It's 60 days to file Form 17.

An investment partnership of this size can also be business - see HMRC vs Ramsay.
.

Amjed Khan

17:48 PM, 8th March 2017
About 2 years ago

Reply to the comment left by "Paul Mullally" at "06/03/2017 - 11:12":

Hi do you have a specialist tax advisor you can recommend and what does he charge?

Mark Alexander

18:21 PM, 8th March 2017
About 2 years ago

Reply to the comment left by "Amjed Khan" at "08/03/2017 - 17:48":

That's what my wife and I do. She is a Chartered Accountant and whilst I am not professionally qualified by an accountancy body I do have neatly 30 years experience in property, finance, tax and law.

Please see >>> https://www.property118.com/optimal-tax-planning/91857/

We charge £400 for a private consultation (telephone and email based) and offer a total satisfaction or full refund guarantee.

For recent testimonials please see >>> https://www.property118.com/consultancy-mark-alexander/61522/comment-page-5/#comments
.

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