Rental income from residential and commercial properties is usually taxed annually by filing a self-assessment tax return/company accounts. Landlords are required by statute to declare their net profit from their rental portfolios/businesses to HMRC annually. Every year here at DNS Accountants, we file 1000’s of tax returns both for individuals and companies for national and international Landlords to ensure they remain compliant and tax-efficient. DNS Accountants are one of the leading tax experts when it comes to dealing with Landlords.
The question arises here – If the landlord has forgotten to disclose their rental income to HMRC, how likely HMRC can find out? In our opinion, most likely, Yes.
Most Landlords tries their best to remain compliant with tax laws. However, some new landlords may still forget to meet their tax obligations due to the hustle and bustle of dealing with various obligations such as property purchase, making repairs/renovation, finding tenants for letting, insurance arrangement, negotiating agent fees, health and safety etc. HMRC assess each case on its own merits. Also, some longstanding landlords running property business may forget to add rental income from an individual property due to the size of their portfolio, mistakes can happen. We have seen a sharp increase in the number of HMRC inquiries happening since 2016 into UK landlord’s tax affairs. HMRC has capped the mortgage interest for higher rate taxpayers, which has increased the rental profits and has resulted in high tax bills. The need for appropriate tax-efficient structures has grown more than ever.
We highly recommend that you seek advice from a professional before disclosing your undeclared income. Experts may help you mitigate the tax exposure and minimise the HMRC penalties. DNS Accountants have been helping landlords since 2005 and have helped 1000’s of landlords reduced their tax bills whilst remaining compliant. We have also helped onshore and offshore landlords/businesses to declare any undisclosed income to give them peace of mind.
What are the obligations?
If you are employed, and your rental profits are £2,500 or less, the tax will automatically get collected by HMRC through the taxpayers PAYE code. In contrast, if your gross income is more than £10,000 or net income after deducting the allowable expense is more than £2,500, you must file a self-assessment tax return for which the dates are mentioned below –
- If the tax return is made electronically – 31 January 2021 (For the tax year 2020-21)
- If the submission is made through paper return – 31October 2021 (For the tax year 2020-21)
DNS Accountants has been dealing with UK and Overseas landlords since 2005, we specialise in dealing with property taxes and property tax restructuring.
As far as tax rates for a rental property are concerned in 2020/21, it depends upon the other income earned by the taxpayers above their personal allowance at –
- 20% for the first £37,500
- 40% for the next £112,500
- Above 45%
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.
Rent a room relief
Rent a room relief allows landlords like you to earn tax-free income up to a threshold of £7500 per year by letting furnished accommodation in their main residence. This is an automatic tax exemption given to the landlords like you if you opt for this scheme and earn less than £7500. In case you are earning more than this, it is mandatory for you to submit your tax returns to HMRC. You can choose to opt for this scheme and claim the tax-free allowance while filing your self-assessment tax returns.
How will HMRC find out?
HMRC has adopted various methods to uncover the undisclosed rental income which are as follows: -
Stamp duty land tax(SDLT) –This department maintains records of purchased/transferred properties in England and Northern Ireland (Scotland and Wales have their own equivalents systems). When an individual or company purchases a property, except certain property or land transactions, almost all property/land transactions are subject to SDLT return even if there is no tax to pay. Amongst various other details, the record of property includes –
- Purchase price
- Name of the owner
- Address of the property
If the same individual purchases multiple properties, it triggers HMRC that other properties may well be used for other than residential use, i.e. earning rental income. There fore, searching SDLT records is considered to be the easiest tool in their disposal to identify multiple property ownership.
HM land registry– In addition to the SDLT, HMRC has direct communication with HM land registry which contains records of all the properties and land sold in England and Wales since 1993. HM land registry includes the following information –
- Registered title
- The current registered owner
- Whether freehold or leasehold
- The total amount paid for the land
- Mortgage details (which include name and address of the mortgage lender and the payment status)
- A plan of the land, etc.
If HMRC didn’t receive an election for private residence relief in multiple properties, this could send a red signal to HMRC that the landlord has not declared their rental income for the numerous properties.
Estate agent– Most landlords, take the services of estate agents to manage their properties. There are many regulations which an estate agent must comply with. Estate agency acts as a facilitator and must maintain its client’s record. Estate agents are being targeted by HMRC to provide details of rents collected by landlords. Once HMRC has issued a statutory notice to an Estate agent, they must respond within 60 days, failure to comply will result in an initial fine of £3,000.
Security deposit– Landlords take security deposits from their tenants at the start of the tenancy to protect their property from damage or rent arrears. In case, it is an assured short-hold tenancy contract in England or Wales (most of them are), landlords must pay the security deposit in the scheme approved by the government. HMRC can conveniently access their records to obtain the information about any landlord who has deposited funds in these schemes.
Electoral register– This is a main source of information for HMRC. The Electoral register contains the names and addresses of all individuals living in the UK and registered for voting. Upon registering for Vote, the register is updated with the individual living at the property. Not every individual can vote, you can only vote if you will meet the following conditions –
- You must be 16 years old or above
- You must also be a British National or EU National or a Commonwealth country.
In case you have two homes, you need to register twice for the electoral register. Registration can be made through the National insurance number (NIN), which again links individuals with the property through the electoral register.
It was estimated in 2013 that 64% of the landlords were not declaring their rental income; as a result HMRC launched a scheme called Let Property Campaign to encourage landlords to disclose their undeclared rental income.
We have seen a sharp increase in the number of HMRC enquiries recently due to the amount of information they have for landlords from various sources. We strongly advised individuals/companies to seek professional advice and take the initiative to disclose their income to avoid risk being caught by HMRC; this will save you from heavy penalties and unnecessary stress.
DNS Accountants have been helping landlords since 2005 and have helped 1000’s of landlords in the UK and overseas with reducing their tax bills whilst remain compliant. Contact DNS Accountants on 03330886686, or drop us an e-mail at firstname.lastname@example.org