[Solved] CMS and property rental income

Hi There,
.
As far as I am aware, you will be assessed on your income only, so that would include your earned and income from your rental property, so anything that you declare to HMRC, they aren't able too (as far as I know) take your property value into account, otherwise any non resident parent who owned thier own home out right would have to pay more, there are no section or questions asked about this when CSA or CMS assess.
.
GTTS

Hi sean.s

As a new non-resident wallet, you will find the rules for CMS payments horribly confusing and messy. It is considered one of the worst pieces of legislation ever conceived, and has been amended countless times, with no less than three distinct "schemes" since the 1990s. That is not taking into account the unfairness and sometimes bizarre decisions the CMS makes, and the inconsistent information given out by call handlers at the CMS.

One area of greatest change in the most recent CMS/CSA overhaul - has been the "provision" for high-earners and/or those with investments, property income and the self-employed. While the self-employed have now got quite an easy ride (with lots of obvious ways in which to reduce the amount CMS can claim), relative to previous schemes, those with property income have not been as fortunate.

To answer your question - if you look at the "rules" here
http://www.dad.info/forum/child-maintenance/45247-the-child-support-maintenance-regulations-2012
Paragraphs #21 and #69 are the relevant ones for you.

In short - unearned income from property is taken account of, when
a) it is above £2,500 pa
b) after, relief under section 118 of the Income Tax Act 2007(a)

The interesting bit for you - is that this is *not* done as a matter of course (i.e. you do not have to declare it - HMRC will simply give CMS your most recent P60/Gross income - net pension). To have this [unearned income] taken into account, the resident parent (your ex) will need to make an application for what is know as a "variation" based on "additional unearned income". I guess the important bit is that if she is unaware, then she would probably not make an application for variation.

Regarding the capital value of any property - this does not ordinarily factor in (it used to be the case that assets over £65,000 were "assumed" to yield an income of 8% (!!), but no longer so under the new scheme rules). In this regard a number of "variations" used by the resident parent (known as upward variations) have been removed under the newest (2012) rules.

I hope that helps

Hello Sean.s

With you having a family-based arrangement in place you may wish to speak to your ex-partner regarding your maintenance payments and what is taken into consideration when calculating child maintenance. Although family-based arrangements are not legally enforceable, parents can decide the terms of their agreement to suit their current circumstances, as there are no strict rules or formulas to follow. It can include money and other kinds of support, for example providing clothes.

The Child Maintenance Options website has a useful tools and guides section that you and your ex-partner may find helpful when trying to negotiate your family-based arrangement. This can be found at http://www.cmoptions.org.

The Child Maintenance Service works out child maintenance using the paying parent's gross income, which is income before Income Tax and National Insurance are taken off, but after occupational or personal pension scheme contributions are taken away. In most cases this gross income figure comes from information given to HM Revenue & Customs by the paying parent, their employer or a third-party such as an accountant.

I have included a link on how the Child Maintenance Service works and how they calculate child maintenance that you may find useful, https://www.gov.uk/how-child-maintenance-is-worked-out/how-the-child-maintenance-service-works-out-child-maintenance.

For more information on all the different ways to set up child maintenance and for a more personalised service, you can visit the Child Maintenance Options website.

The DWP have a sorting out separation web-app that you may find useful. It offers help and support to separating and separated families. The link is: www.dad.info/divorce-and-separation/sorting-out-separation.

Regards

William

Thank you TashasHideousLaugh.

Thank you TashasHideousLaugh.

You're welcome :side:
THL

Thank you very much THL for providing that detailed and completely relevant post which has addressed my questions. It is utterly confusing and messy as you've rightly said and even though you've offered me a laymans term explanation of paragraphs 21 & 69 (which I appreciate as I'd never have been able to interpret that document myself) I have a further couple of questions related to your post that I hope you can clarify? You've said that my rental income above £2.5k is taken into account, so in my situation would I be liable on the whole £8050 received or on the difference between the two? Have I interpreted your point re HMRC and CMS correctly regarding declaration of rental income - If CMS contact HMRC now then my rental income is not visible or factored in, simply because I've not yet needed to do a tax return for it. Next year at annual review, once my rental income has been declared to HMRC, CMS will receive information again from them but this time my 'extra' rental income will be factored in as an example: If my last year's P60 showed £23k (no 'extra' income) then that is what CMS will use and the following year my P60 shows circa £30k that is what they will then use? More worryingly for me was the possibility of the capital in the house being plundered and it sounds like I've been lucky to be on the 2012 scheme and not the previous. 8%!! Who in their right mind would come up with such an extortionate amount..? I'm sure there are people on this site who have fallen foul of that ridiculous rule and I sympathise entirely. Slightly worryingly for me in that same paragraph you have said 'Regarding the capital value of any property - this does not ordinarily factor in'... not ordinarily! I don't want to be concerned about something if the risk is almost non-existent but at the same time I'd have preferred it if you'd said 'never' or 'not factored in'! Can you expand on this a bit for me please and give me an example if you can of when the property capital could be considered? I'll not ask about section 118 of the Income Tax Act 2007 as now you've provided me with that title I'll do a bit of research into it. It may not be apparent given the further questions that I now have subsequent to your post but it has helped put my mind at rest a little so many thanks again. Sean

I'm not sure how the new BTL tax changes will affect this situation (but not Sean as he does not have a BTL mortgage). It would appear that under the new arrangements the gross rents (before mortgage interest is taken off but after insurance &c) will appear as taxable income, then the landlord will receive a tax credit equivalent to 20% tax..

This may increase CSA payments as the taxable income will increase (even if the tax take does not due to the tax credit). The problem I'm seeing is that if CSA bases CM on pre-tax income under the new rules (i.e. before mortgage interest payments are taken off) and charge CM on the whole amount rather than the net income then BTL may become not viable as an investment.

The new rules will start phasing in next year, so there this is quite imminent. Had anyone else given it any thought?

O

Hi I will try to answer - but do bear in mind - even though legislation says one thing....that does not stop CMS call handlers from simply forcing you to go through an appeal (the system works in a particular way with frontline CMS call handlers, backed-up by CMS case workers. At later stages of an appeal, your details may eventually reach a judge who has a full command of the legislation - so in short, you may have to "fight for your rights" so to speak...and work yourself through the ranks of CMS staff...

Caveat: I'm not a tax specialist!

You've said that my rental income above £2.5k is taken into account, so in my situation would I be liable on the whole £8050 received or on the difference between the two?

I interpret that as being liable for the whole amount - but first must reach a threshold of 2.5k to be taken into account.

Have I interpreted your point re HMRC and CMS correctly regarding declaration of rental income - If CMS contact HMRC now then my rental income is not visible or factored in, simply because I've not yet needed to do a tax return for it. Next year at annual review, once my rental income has been declared to HMRC, CMS will receive information again from them but this time my 'extra' rental income will be factored in as an example: If my last year's P60 showed £23k (no 'extra' income) then that is what CMS will use and the following year my P60 shows circa £30k that is what they will then use?

Not quite (but yes, at annual reviews your "income" will be updated). I will assume you are employed and have a P60 showing PAYE taxable income. I will also assume you have rental income which is then declared to HMRC via self-assessment (so not on PAYE end of year returns). When you or your Ex first contacts CMS, they will obtain from HMRC the latest P60 for you. On this, no rental income will show. The CMS will do a "default" maintenance calculation (no allowance for shared care, or other variations, etc). This "default" calculation is then sent to both parties (your Ex and you). At this point - either you or your ex can apply for variations, but importantly - you ex will only apply for a variation of "additional income" if she has a reason to (i.e. she knows about your rental income). If you are self-employed, then HMRC will provide CMS with the latest annual self-assessment return, and on this will be your rental income. But even in this case, you ex will still have to apply for a variation to include any "unearned income". In anycase, if you are self-employed, your accountant will be able to (quite easily) reduce your entire maintenance calculation down to zero - making the question about rental income somewhat irrelevant. Take a look here for a basic overview of the 2012 legislation:
https://www.citizensadvice.org.uk/relationships/children-and-young-people/child-maintenance/child-maintenance-2012-scheme/child-maintenance-calculation/the-2012-child-maintenance-scheme-calculating-maintenance-income/

More worryingly for me was the possibility of the capital in the house being plundered and it sounds like I've been lucky to be on the 2012 scheme and not the previous. 8%!! Who in their right mind would come up with such an extortionate amount..?

Good question - the CMS do get bad press (quite rightly), but it does represent the convergence of finance+tax+law+welfare state+relationships+children .. if ever there was a toxic mix, that surely is it. That is not to say they cannot do better...! 8% comes from the 1990s, I think!

Slightly worryingly for me in that same paragraph you have said 'Regarding the capital value of any property - this does not ordinarily factor in'... not ordinarily! I don't want to be concerned about something if the risk is almost non-existent but at the same time I'd have preferred it if you'd said 'never' or 'not factored in'! Can you expand on this a bit for me please and give me an example if you can of when the property capital could be considered?

The capital of an existing property is not factored in to "everyday" CMS cases that do not go before Tribunals. Yes, I can expand - but given how complex the legislation is, and the diversity of business/financial arrangements - it is not really possible (or accurate) to give a yes/no answer in such a limited format as a public forum (for one, I don't have all the facts - even basic ones such as are you self-employed, or a pensioner, etc). But here are some pointers that you can hopefully research further. I was referring to situations that go to appeal and Tribunal - where a judge/panel are free to examine all details of a case. The situations in which these types of things arise almost always involve complicated business/tax/financial arrangements. Of course, providing a complex specific or idiosyncratic example here is not really possible...(you can search for such cases online, though) but examples include such things as "diverting unearned income" into capital - or a self-employed person investing money into capital assets solely to reduce/divert income (a resident parent can apply for a variation known as "diversion of income" - under which these fall). How these relate to an existing property is limited only by imagination and financial engineering...But, the point is *if* such matters do go before a judge *and* it is deemed that maintenance is owing via a diversion of income - then it is possible a judge could order some asset liquidated and disbursed back as maintenance (for instance). But as you are telling me your ex does not know about the other property...then it is highly unlikely even a variation of additional income will be requested. And in any case, as I mentioned, this provision to take assets into account on appeal has been greatly diminished by the 2012 rules - it would be highly onerous (and nearly impossible if you are self-employed) for your ex to "prove" her case.

hope that helps
THL

Brilliant THL! Plenty there for me to dissect and attribute the rules to my current situation. A detailed post which completely answers my questions warrants a much longer reply than this though there is nothing more I can say other than... Yes, you have helped me considerably and thank you very much!

With regards to property incomme, it should be the figure you are taxed on, so it will be after all expenses have been deducted, including mortgage interest etc (but not the capital repayment element). You might actually be better switching to paying interest only for the moment as this will keep the interest element higher, and put the extra into an account to pay of a lump sum later on.

Do not wish to appear rude, but it comes to something when non resident parents try to reduce the payments they make to the resident parent when having bought a property outright and have someone in it paying rent! I hope the money made is being put into a savings account for if their children decide to go to University one day!