HMRC Dept (Bankruptcy)

[engcc]

Hi Guys

Some advice please if possible.

My mother & father have run a property business for 20 years (basically buy to let properties) and they currently have about 9 properties all mortgaged. During the past 6 years my father has sold about 6 or 7 seven properties, paid capital gains tax as instructed by accountant. They have just had a tax inspection from HMRC and have now been told my father owes 118k and my mother 152k for self assessment tax and capital gains. A letter from HMRC has threatened bankruptcy, which will probably happen as they dont have that kind of money and all the other properties they have are mortgaged and have little or no equity in them given the state of the property market at this time. Please could you advise me if HMRC can take the other properties, or do the bank who they are mortgaged through have the first claim ? To complicate things further my mother is business with my sister, what would happen to this business ? and would my sister be dragged in and made bankrupt ?
Any advice would be appreciated.

 

[SamStones]

Hi,

A couple of questions to get you going; Is your parents business a limited company? Is your mothers business with your sister limited?

 

[Spongebob]

The reference to Self Assessment and no mention of Corporation Tax suggests to me that they were not operating the property business as a limited company. I will proceed on this assumption.

When your parents are made bankrupt an insolvency practitioner will be appointed to be their Trustee in Bankruptcy. The trustee will take over all aspects of your parents' finances and sell whatever assets he can in order to free up funds for their creditors, This will include all the rental properties, the family home, and any other assets your parents have. Any finance secured on any of the assets will be paid off first before the balance is put aside for payment to creditors.

I'm sorry, but I find it difficult to believe that your parents have benefited from the most benign conditions for property speculation in history and have nothing to show for it apart from 9 heavily mortgaged houses. You say that they have sold 6 properties in recent years; where has the money gone from those?

Your sister can only be drawn in if she too owes money to HMRC.

There is clearly something you are not telling us. A villa in Spain or Florida perhaps?

If there are any other assets your parents' best plan by far would be to dispose of them now and use the proceeds to pay off their tax bill. They could for instance, sell their own home and move into one of their rentals. This would be far preferable to bankruptcy.

 

[engcc]

Hi

Yes my parents do not operate as LTD company, they are a partnership ans so is my sisters business. To be perfectly honest we are not sure where the taxman has his figures from as they seem extortionate to say the least. My father paid approx 35k in 2007 for capital gains on properties he'd sold that year. Theres certaintly no exotic villa's or fancy cars on the drive. Basically I just think he's been caught out big time as admittedly his accounting skills are poor, lumping everything in bin bags and dropping it at the accountants office is his idea of book keeping.
All the remaining properies are on interest only mortgages and theres very little equity in any of them. My sisters business was set up by my parents, 30k deposit for mortgage and refurbished. Although only my mothers name is on that mortgage along with my sisters.

 

[Spongebob]

Although only my mothers name is on that mortgage along with my sisters.

In that case your mother owns half the equity. The trustee will want to get his hands on that and so your sister will probably have to buy her out. Or sell up.

As for the rest of your parents' property portfolio, the trustee has a problem. If there is negative equity it is difficult to see how he can sell the properties so I guess they will simply be repossessed by the lender(s).

I feel far more sorry for the tenants than I do for your parents. You still haven't told us about their own home. Is there any equity there?


£35k in CGT after selling 'several' properties at the peak of the biggest housing bubble in history doesn't sound a lot. No wonder HMRC are after blood.

 

[engcc]

My parents home is also mortgaged, and with the property 'bubble' bursting I doubt if there would be much equity in that, 15k max.

 

[Mitchells Bristol]

Just on a separate issue, has anyone been through and scrutinised HMRC's assessment?

You say the taxpayers have an accountant working for them who presumably prepared the returns to declare the gains when the properties were sold. How was such a large error made on the capital gains tax pages of the returns to now give rise to such large tax liabilities under enquiry?

Taking capital gains tax at a very, very simplistic level, the accountant would take the Completion Statement from the sale of the property and the Completion Statemenf from the acquisition of the property and declare the difference as a gain. I have very much over-simplified this and there are lots of other things to consider in the computation, but even if the accountant did this very simple exercise he would be there or thereabouts with the tax liability.

What happened for the tax returns to be so far wrong?

 

[engcc]

Just on a separate issue, has anyone been through and scrutinised HMRC's assessment?

You say the taxpayers have an accountant working for them who presumably prepared the returns to declare the gains when the properties were sold. How was such a large error made on the capital gains tax pages of the returns to now give rise to such large tax liabilities under enquiry?

Taking capital gains tax at a very, very simplistic level, the accountant would take the Completion Statement from the sale of the property and the Completion Statemenf from the acquisition of the property and declare the difference as a gain. I have very much over-simplified this and there are lots of other things to consider in the computation, but even if the accountant did this very simple exercise he would be there or thereabouts with the tax liability.

What happened for the tax returns to be so far wrong?

Bad or no advice from my fathers accountant with respect to buying and selling property coupled with his own lack of understanding of basic book keeping have lead to this scenario. He changed accountatnts in 2006 due to rapidly increasing fees, this he now realises was a mistake as the previous accountant basically used to keep him informed of tax liabilities and would advise everytime he would sell a property what CGT would be. His current accountant never did this, so I guess he only has himself to blame. I apologies for the sketchy information, I'm only submitting what I know. I have seen the HMRC letters threatening bankruptcy within 7 days if the balance isnt cleared. I can honestly say though I really do not know where the taxman has derived these figures, as any property sold by my parents weren't hugely profitable. 15k to 20k absolute max profit. He has not sold a property for about 4 years now so this is not current CGT. My parents would prefer not to go bankrupt, but they doubt the taxman will accept a repayment plan for such large amounts.

 

[andygambles]

But have they borrowed more on some properties to buy others? That additional borrowing is a gain when they came to sell the property.

 

[engcc]

But have they borrowed more on some properties to buy others? That additional borrowing is a gain when they came to sell the property.

Yes thats exactly what he did to aquire more properties.

 

[Mitchells Bristol]

as any property sold by my parents weren't hugely profitable. 15k to 20k absolute max profit.

So if they sold, say, six properties with a gain of £20k each, the total capital gain would be £120k, maximum capital gains tax rate of 40% (with potential for non-business asset taper relief), which means the total liability would be £50k.

Who handled the enquiry for them - the existing accountant who didn't advise them properly?

I appreciate you don't know the full details, but it would be worth finding them out and getting a competent accountant to look over this as well, before submitting to such a large liability and bankruptcy.

If they have represented themselves in the enquiry, or been represented by an inexperienced accountant then it may be that the liability can be reduced.

 

[engcc]

So if they sold, say, six properties with a gain of £20k each, the total capital gain would be £120k, maximum capital gains tax rate of 40% (with potential for non-business asset taper relief), which means the total liability would be £50k.

Who handled the enquiry for them - the existing accountant who didn't advise them properly?

I appreciate you don't know the full details, but it would be worth finding them out and getting a competent accountant to look over this as well, before submitting to such a large liability and bankruptcy.

If they have represented themselves in the enquiry, or been represented by an inexperienced accountant then it may be that the liability can be reduced.

Yes the existing accountant has been dealing with this, I have already suggested a second opinion from another accountant but I'm not sure if they have the time now before HMRC make them bankrupt. Has HMRC got prevelance over the bank on mortgaged properties ? Or does the bank who hold the charge have priority ?

 

[Mitchells Bristol]

The bank has priority as they have a charge over the property.

I would strongly urge you to get the figures checked - do get a second opinion as quickly as possible as the numbers at stake are substantial.

 

[engcc]

The bank has priority as they have a charge over the property.

I would strongly urge you to get the figures checked - do get a second opinion as quickly as possible as the numbers at stake are substantial.

Cheers, I'll keep the thread updated for future reference.

Thanks all

 

[Alan R Price]

There is a procedure called an individual voluntary arrangement which is intended for this type of situation. An IVA is a formal agreement between a debtor and his creditors to compromise his debts as an alternative to bankruptcy. It can be structured around realisation of assets, or payments from future income, or a mixture of both. The advantage for creditors is that it is a cheaper, less formal procedure than bankruptcy, so they usually receive a better return at an earlier date. From the debtor's perspective, he stays out of bankruptcy, is relieved from the pressure of his debts; and to a large extent retains control of his affairs. An IVA can only be administered by an insolvency practitioner.

Have a look at my trade association's (R3) guidance booklet: http://www.r3.org.uk/media/document...al/Is-a-Vountary-Arrangement-Right-For-Me.pdf. Give me a call if you would like an informal chat about the process. My number is on our website: www.marshmanprice.co.uk.

 

[David A]

You say the taxpayers have an accountant working for them who presumably prepared the returns to declare the gains when the properties were sold. How was such a large error made on the capital gains tax pages of the returns to now give rise to such large tax liabilities under enquiry?

But as many of us on the forum know, some 'accountants' are only able to produce accounts - tax planning or tax advice is beyond their knowledge and capabilities.

Sadly, as appears in this case, no advice or warnings regarding the CGT consequences of re-mortgaging and using the equity to buy more properties was not explained.

 

[andygambles]

But as many of us on the forum know, some 'accountants' are only able to produce accounts - tax planning or tax advice is beyond their knowledge and capabilities.

Sadly, as appears in this case, no advice or warnings regarding the CGT consequences of re-mortgaging and using the equity to buy more properties was not explained.

This what I was alluding to earlier and what I think has happened. I talk to a number of BTL beginners who think they can remortgage to pay another property. Then when they sell the original they only consider profit to be the difference between the mortgage and what they sell for. Forgetting they gained another £50k on the remortgage.

 

[Spongebob]

On a purely personal note, it is my fervant hope that many other buy-to-let landlords get into similar difficulties.

Their greed has skewed the housing market to the point that potential first-time buyers face an almost impossible task in making that first step.

If the nation's stock of BTL properties were available for owner-occupation again it would only be a good thing.

 

[Alan R Price]

Ouch, Bob! But I take your point.

 

[David A]

Their greed has skewed the housing market to the point that potential first-time buyers face an almost impossible task in making that first step.

If the nation's stock of BTL properties were available for owner-occupation again it would only be a good thing.

But should first time buyers even be considering making that first step?

In France and Germany it is unusual to buy one's own property - on this side of the channel it is regarded as almost a human right to be able to buy the property you live in.

It is even called 'the property ladder' which is a fallacy. In my view many people who have bought their house are shuffling a pack of cards - with the hope that they will be dealt a decent hand.

I have been a Mackenzie Friend to a number of people who have found to their cost that buying their house was, probably, the biggest error they have ever made in their whole lifetime. Due to the randomness of Fortune's Wheel, and not of their choosing, they have hit a problem and found that they are being hung out to dry.

First case: Married couple, 2 incomes. Two years previously took out a second mortgage due to the increase in equity as a result of paying down the first mortgage and the increase in property value. They used this money in a good and legitimate way to re-wire, update the heating system and provide a downstairs toilet (i.e. it was not used for frivolous things like cars and holidays). They had 4K savings. Anyway, within 3 months he had a stroke and she had a heart attack - thus from two incomes they went to no income. After two months their savings had gone (both mortgages came to just under £1,200 pcm). At four months the second mortgagor was starting possession proceedings. The stress of being evicted caused the wife'e health to deteriorate further. I managed to work with them and found a solution, but sadly the wife died six months later.

Second case: Single chap, decent job, bought the flat he lived in. Company went bust not even having money to pay salaries. Chap realised that the State would not help with mortgage interest for 10 months, but after 5 months found himself on the receiving end of possession proceedings. Suffered chronic depression and was aware that he would be evicted for mortgage arrears before the 10 months was up. As a temporary measure, he re-mortgaged which gave him enough cash to last to the 10 month waiting period. Once he had clocked up this time he went back to Benefits and put in a claim for mortgage interest. "Sorry" said the clerk, "as you re-mortgaged, the 10 month clock starts again from that date". His flat was re-possessed, and he now lives rough or in a homeless hostel.

Third case: Chap only owed 10K mortgage on his place worth £80K, but was unemployed and was in serious arrears, with an eviction date a week away on the Wednesday. He signed an authority, and I negotiated with his building society for a few days and found a solution the previous Monday at 11am. I sent him a positive text, but had no response; his phone was on voicemail. After another two days I had a visit from the police - he had hanged himself on the Sunday in the field behind his property.

Being an owner-occupier is high risk.

 

[Alan R Price]

David

I agree that we are too fixated with the idea of home-ownership in this country however I think we have to let people make their own decisions and deal with the consequences. There will always be genuine bad luck stories and one would hope there were sufficient fail-safes and back-ups to assist most people in those circumstances; although clearly not every case will be adequately covered.

We also need responsible lending which, quite frankly, we did not have in the late 1990s/early 2000s, when vast sums were lent to people who simply could not really afford to repay them if their circumstances changed. We are seeing the legacy of that now.

 

[Newchodge]

Also, if we are to move away from home ownership we need a stable and accessible rented market

 

[Alan R Price]

Agreed, Cyndy. We need to look at providing affordable town-centre flats as you see in French and Spanish (and I believe German) cities, where people actually live near offices, shops, restaurants etc. This will help breathe life into some of our tired old towns and city centres (e.g. Wellingborough, where I live), and stimulate B to C businesses in those areas.

 

[businessfunding]

David


We also need responsible lending which, quite frankly, we did not have in the late 1990s/early 2000s, when vast sums were lent to people who simply could not really afford to repay them if their circumstances changed. We are seeing the legacy of that now.

I agree, however we now have responsible lending which is pretty much universally condemned - including by politicians and media

 

[Spongebob]

I agree, however we now have responsible lending which is pretty much universally condemned - including by politicians and media

Quite.

The current situation regarding the availability of mortgage finance is not much diferrent to that when I bought my first house in the early 1980s. I had to save up a deposit of 15% and could only borrow 3 times my gross earnings.These conditions to me seem responsible and quite normal. What has happened in the interim is the aberration.

The diferrence of course, is that my first house cost £17,000 and the same house today would be marketed for around £150,000. Earnings have not increased by anything like as much as house prices.

Only an idiot could come to the conclusion that more availability of mortgages is the answer. Irresponsible lending was the main cause of the explosion in house prices to their current unsustainable level. A return to sensible price:earnings ratios is essential, and this can only be achieved in the long term by static prices while earnings catch up, or in the short term by a crash in house prices akin to what has happened in Ireland, Spain, and parts of the USA.

The emergance of the 'But To Let' mortgage has been a major factor in compounding the problem. Historically residential mortgages were offered to potential owner occupiers by mutual building societies. The builing society was the innovation that facilitated the massive rise in home ownership in this country in the 20th century and formed our culture as home owners. Unfortunately the Thatcher government saw fit to destroy the building society movement and gift the mortgage market to commercial banks who operate without any eye on the social consequences of their actions.

The Buy to Let mortgage had been a total disaster for the housing market. Small houses - the very properties that young first-time buyers have always bought as a starting point - have been targeted by avaricous amateur landlords like the OP's parents causing prices to rise out of the reach of a whole generation of ordinary working people. They are forced to pay rent to these parasites instead of being able to fulfil their dreams of owning a modest home of their own. Of course, once you are trapped in the private rental prison, saving for a deposit becomes even more impossible!

I've got several more pages of this diatribe to go but I've got to get to work!

 

[Alan R Price]

I agree, however we now have responsible lending which is pretty much universally condemned - including by politicians and media

I agree as regards the mortgage market however in the small business sector I think there's a difference between "responsible" and "running scared"

 

[businessfunding]

I agree as regards the mortgage market however in the small business sector I think there's a difference between "responsible" and "running scared"

Perhaps not a popular stance on a small business forum, but the standard of funding proposals I am seeing (and the personal commitment / support of the borrowing) is frankly dreadful.

The effect of the stupid 'force the banks to lend' message seems to have given borrowers the impression that there is a duty to lend.

I stand by my theme - show me a well put together business proposition, with support behind it and there is funding out there.

 

[Alan R Price]

kickstartbtm

I agree that there is no obligation to lend where the figures don't stack up; and as you say, a lot of funding applications are poor and lack commitment from the directors; however I have heard a large number of tales from accountants and business owners themselves that lead me to believe that there is an unwillingness on the part of banks to lend unless the risk is totally taken out of the equation. There needs to be balance.

 

[businessfunding]

kickstartbtm

I agree that there is no obligation to lend where the figures don't stack up; and as you say, a lot of funding applications are poor and lack commitment from the directors; however I have heard a large number of tales from accountants and business owners themselves that lead me to believe that there is an unwillingness on the part of banks to lend unless the risk is totally taken out of the equation. There needs to be balance.

Alan

I agree that mainstream banks are unwilling and unable to lend freely

- Unable because the much publicised bailout only gave them sufficient capital to be 'legal' certainly not spare resource to lend

Unable because the latent bad debt situation is huge - potentially disaterous, so they have to retain reserves and keep risk to an absolute minimum.

There are, however, many sources of non-bank finance who will lend in the right situations.

 

[Alan R Price]

There are, however, many sources of non-bank finance who will lend in the right situations.

Indeed - we deal with a number of them!