In September 2013, HM Revenue & Customs (HMRC) announced a nationwide campaign, targeting residential property landlords who had not declared their rental income.
This has become one of the largest (and longest) onshore campaign that HMRC has launched to date and it affects hundreds of thousands of landlords.
When the campaign started HMRC took a data-driven approach. The campaign specifically targets individuals letting residential property. HMRC believes there are as many as 1.5 million landlords in the UK, but fewer than 500,000 officially on its books. It is, therefore, no surprise that HMRC sees an opportunity for tax and penalties from the roughly one million ‘missing’ landlords.
Where does HMRC get its information?
HMRC has very broad information powers, to obtain details from:
Councils – for landlords providing accommodation to housing benefits claimants;
the Land Registry – for details of who holds the legal ownership; and
more recently, HMRC has also acquired powers to require details from organisations about third parties (in FA 2011, Sch 23). These organisations specifically include letting agents, or anyone else who searches for tenants or provides a similar service. It also includes businesses that take a commission for services provided by another party, and anyone who handles money on another’s behalf. Clearly, this goes beyond traditional estate agents, encompassing Internet-based letting services as well.
HMRC has also spent the last few years developing its systems and expertise to manage and analyse ‘big data’, in this case, to derive a large list of hitherto unknown persons in receipt of rental income.
What do I need to do if I have undeclared rental income?
Basically, there is no obligation in law to notify HMRC of any rental income, if there is no net liability to income tax (see TMA 1970, s 7; HMRC’s Self-Assessment manual SALF210). However, even if there are losses, you may be doing yourself a disservice by not claiming your losses for relief against future profits.
As a landlord you should consider:
Does your income qualify for the rent-a-room scheme? This is essentially where someone takes in a lodger, or similar. Rent-a-room is optional, so if the normal rules for deductible expenses yield a better result, these can be used instead. The details are in HMRC’s Property Income manual (at PIM4001 et seq);
Do you have any unused personal allowance which may be used to minimise your tax bills? This may occur where you have no other significant income sources.
Is your property a joint investment? There could be only one legal owner but it can still be a joint investment. This means that the net income can be apportioned amongst two or more taxpayers and potentially two or more personal allowances may be available. Some key questions include, If married, did the funds/deposit come from a joint account? Were both spouses involved in the negotiations? Was the net income split between them?
Have you claimed all your allowable expenses? It may seem obvious, but make sure that all expenses have been claimed, so as to minimise tax and therefore penalties and interest exposure, potentially down to nil.
Possible tax traps
Remember, when claiming to claim mortgage costs that the entire repayment is not deductible. Capital repayments must not be claimed.
Where your property is let jointly between spouses, net income is split 50:50 by default: you cannot override that split going backwards.
From 06/04/17, there are restrictions on the amount of interest that can be claimed as a deduction against your rental income.
Do bear in mind that adding rental income to earlier years may adversely affect past entitlement to state benefits.
Penalties are normally calculated as a percentage of the tax underpaid.
Penalties can arise for the failure to submitted returns for the relevant years
Penalties can also arise if a return was submitted but missing information leads to a penalty for an inaccurate return.
On a final note, please take note that that the penalties are increased if HMRC writes to you about undeclared income before you contact HMRC.
Given the information and resources at HMRC’s disposal, it is more a question of when HMRC will write, not if, so any concerns should be addressed as soon as possible.
If you need help making an unprompted disclosure or wish to know more about the let property campaign, please call us on 01808750640.