Rental income received by individuals from properties is usually taxed annually by filing a self-assessment tax return, this is when your income tax liability will be calculated.
If you rent properties via a limited company, then you will submit company accounts and pay Corporation Tax.
Paying tax from rented residential property and commercial property income is a necessary part of running a property business.
If you are running a property portfolio as a sole trader or individual, then as a landlord you are required by law to declare your net profit from your rental portfolios to HMRC annually and pay income tax on the income. HMRC has access to many data sources including information on every property and land transaction in the UK.
If landlords have undisclosed rental income, chances are it will be discovered by HMRC at some point as they use many sources to trace rental income.
In this blog we look at how HMRC may find out about undeclared rental income, what your obligations are as a landlord regarding income tax and NI and schemes available for disclosure.
How likely is it that HMRC will find out about undisclosed property income?
If you rent out property as an individual or run a property business, but forget to disclose some or all rental income, how likely is it that HMRC can find out? In our opinion, it is highly likely that they will find out and will take action to collect the tax due from undisclosed rental income and impose fines as well.
While most landlords abide by the law and remain, some new landlords or those with more than one property or large portfolios may make mistakes or may forget to disclose all their rental property income.
What happens if I make a mistake declaring rental income?
Sometimes landlords fail to meet their tax obligations because of the pressure of other areas in managing a property portfolio such as new property purchases, undertaking repairs/renovations, finding new tenants , insurance arrangements, negotiating agent fees, health and safety etc. However, this is not an excuse to not declare all your property income. Whilst HMRC will assess your case individually, if HMRC suspects a landlord has been deliberately avoiding tax, it can reclaim 20 years’ worth of tax payments. They can also impose fines and penalties up to the total value of any unpaid tax, as well as the underpaid tax.
How is rental income taxed?
Any rental income you receive from monthly rent, non-refundable deposits and money from tenants for repairs, will need to be declared. The total amount is submitted to HMRC and the amount of tax owed is dependent on the personal tax band that your total income falls into.
If being a landlord isn’t your only job or income source, then the income you make from rental income needs to be declared, along with income from other sources. The amount of income you receive will be added to your income from other forms of employment or investments and your tax liability will be calculated based on the total.
What are my tax obligations when renting out property?
The different thresholds for tax that individual or sole trader landlords will pay on their rental property income in 2023/24 is below. Remember other income from wages, self-employed profits, interest made on savings and investments, pensions, benefits-in-kind, reimbursed expenses, and redundancy payments can all be counted as taxable income on top of your rental income as well.
The personal tax rates below affect those who are earning property rental profits as individuals or operating as sole traders. Landlords can also invest in buy-to-let property via limited companies, partnerships, and other corporate structures. Should you invest through a company, the profit you’ll make will be liable to corporation tax instead, which is currently 19% - 25% depending on your level of profits. Read more about Corporation Tax rises in 2023 and the rates you may pay here.
If you are merely renting out a room in your main home, then the Rent a Room Scheme lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home. This is halved if you share the income with your partner or someone else. You can let out as much of your home as you want.
We recommend you seek professional advice from a specialist landlord or property accountant such as dns accountants to ensure you pay the right amount of tax on rental income.
Income received by individuals from rental properties - personal tax rates
Every individual has a standard Personal Allowance is £12,570, which is the amount of income you do not have to pay tax on.
Below are the tax rates you pay beyond your personal allowance:
Personal Allowance: £0 – £12,570 0%
asic Rate: B£12,571 – £50,270 20%
Higher Rate: £50,271 – £125,000 40%
Additional Rate: £125,001 and above 45%
Do I need to file a tax return?
You must send a tax return if, in the last tax year (6 April to 5 April), any of the following applied:
- you were self-employed as a ‘sole trader’ and earned more than £1,000 (before taking off anything you can claim tax relief on)
- you were a partner in a business partnership
- you earned £100,000 or more
You may also need to send a tax return if you have any untaxed income, such as:
- some COVID-19 grant or support payments
- money from renting out a property
- tips and commission
- income from savings, investments and dividends
- foreign income
Dates for filing self-assessment tax returns
The last tax year started on 6 April 2022 and ended on 5 April 2023.
- If the tax return is made electronically/online, you must submit your tax return by midnight 31 January 2024 (For the tax year 2022-23)
- If the submission is made through paper return you should have submitted your tax return by 31 October 2023 (For the tax year 2022-23)
National insurance contributions
If you are running a property rental business, you might have to pay Class 2 and Class 4 National insurance contribution in addition to income tax.
You have to pay Class 2 National Insurance if your profits are more than £12,570 a year and what you do counts as running a business, for example if all the following apply:
- being a landlord is your main job
- you rent out more than one property
- you’re buying new properties to rent out
If your profits are under £6,725, you can make voluntary Class 2 National Insurance payments, for example to make sure you get the full State Pension.
Declaring unpaid tax
You can declare unpaid tax by telling HMRC about rental income from previous years.If you must pay a penalty, it’ll be lower than if HMRC find out about the income themselves.
You’ll be given a disclosure reference number. You then have 3 months to work out what you owe and pay it.
Do not include the £1,000 tax-free property allowance for any tax years before 2017 to 2018.
How will HMRC find out?
HMRC uses various methods to uncover the undisclosed rental income as follows:
- Stamp duty land tax records - When property is purchased in England or Northern Ireland, stamp duty land tax (SDLT) is chargeable (Scotland and Wales have equivalents). HMRC therefore hold records of all properties purchased. HMRC knowthat if multiple properties are purchased, they are likely to be rental properties.
- HM land registry - HMRC has communications with HM Land Registry, which holds records on all properties and land sold in England and Wales.
- Estate agents - HMRC consider estate agents to be in an ideal position to identify suspicious property rental activity and will use this as a route to find undisclosed income of individuals.
- Security deposit - If the contract is an assured shorthold tenancy, landlords must put the deposit into a government-approved tenancy deposit scheme. HMRC has access to these schemes and the information contained within them.
- Electoral register - Registration for the electoral register is made through your National Insurance number, HMRC can very easily link individuals to property through the electoral register.
- Informants - HMRC will take seriously people who report landlords. These many be tenants, ex-spouses or neighbours.
The Let Property Campaign
The Let Property Campaign is a campaign run by HMRC and provides an opportunity for landlords who owe tax through letting out residential property, in the UK or abroad, to get up to date with their tax affairs and take advantage of the best possible terms.
If you’re a landlord and you have undisclosed rental income, you must tell HMRC about any unpaid tax now. You’ll then have 90 days to work out and pay what you owe.
Who can utilise the Let Property Campaign?
The Let Property Campaign is open to all residential property landlords with undisclosed taxes. This includes:
- those that have multiple properties
- landlords with single rentals
- specialist landlords with student or workforce rentals
- holiday lettings
- renting out a room in your main home for more than the Rent a Room Scheme threshold
- those who live abroad or intend to live abroad for more than 6 months and rent out a property in the UK, as you may still be liable to UK taxes
Does the Let Property Campaign apply to commercial property?
This campaign is not open to those landlords who are letting out non-residential properties such as a:
- lock up
You also cannot use the Let Property Campaign if you want to disclose income on behalf of a company or a trust.
HMRC estimated there were a significant proportion of landlords not declaring their full rental income and as a result HMRC launched the Let Property Campaign to encourage landlords to disclose their undeclared rental income.
At the launch of its Let Property Scheme, HMRC estimated that there were up to 1.5 million landlords in the UK that were either not declaring or under-declaring income from rental property, costing the UK around £500 million a year.
HMRC continue to invest, time, money and effort to launch HMRC enquiries using information they have for landlords from various sources. HMRC has the tools to find the income, to charge penalties and to recover the unpaid tax with interest.
We highly recommend that you seek advice from specialist property and landlord accountants such as dns accountants before disclosing your undeclared income.
Every year here at dns accountants, our landlord specialists file 1000’s of tax returns both for individuals and companies for national and international landlords to ensure they remain compliant and tax-efficient.
If you need further help or advice on paying tax on rental income, making a disclosure and declaring unpaid taxes, dns accountants can help. Contact us today for help and advice by calling our team on 03300 886 686, or email on email@example.com.
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