The HMRC has several ways to identify your income and bifurcate it between work and rental income.
It requires entities and individuals to pay tax on the rental income after self-declaring the assets and submitting details of the rental portfolio.
No matter how you are running the rental portfolio and in what capacity, all income from this must be reported and is taxed accordingly.
Not declaring your rental income to the HMRC is not recommended because, at some point, the authorities will discover the same. In this blog, we will discuss the ways and means used by the HMRC to trace rental income.
Taxation System of the Rental Income
The buy-to-let income potential is huge; hence, the market is always overflowing with investors wanting a share of the pie. According to the official guidelines, any rental income, non-refundable deposits you get from the tenants and repair money you get must be declared.
On the one hand, you will have to declare all income. But the amount of tax you pay what you owe back to the HMRC depends on the tax slab.
To find your tax slab, the rental income will be added to the total income.
However, if you are a landlord or the owner of several rented properties, you will pay Class 2 NIC, which applies when you run a rental property business.
Class NIC also applies when you are renting more than one property and when you are looking to expand your rental portfolio.
Rental Income Obligations for a Landlord
The rental income taxation obligations are such that property owners earning less than £1,000 per year are not required to declare their income and pay the tax.
Only if your rental income exceeds £1,000, you must declare the income and are liable to pay the tax. Every year, the HMRC requires individuals to declare declared rental income by the 5th October. Let’s see how the rental income taxation process is carried out;
- When the rental profits (income left after paying the allowable expense) is £2500 or less, the owners must pay the tax through the PAYE code.
- In case the gross income from the rental income is more than £10,000, or when the net income is more than £2500, then you need to complete a self-assessment tax return.
- The taxes to be paid from the rental income depends on the tax slab.
Taxes in the UK have three slabs, 20%, 40%, and 45%, which are the basic rate, higher rate, and additional rate, respectively.
The tax you have to pay is on the taxable income at the basic rate limit is £37,700. The higher rate is paid when the income is between £37,700 to £125,140. The additional rate is paid when the total income is over £125,140.
How Can HMRC Know About Your Rental Income?
There are several ways in which the HMRC can find out about your rental income;
1. Through Stamp Duty: The HMRC has records of all the properties bought and sold in the UK. As they keep a check on all the transactions, the authorities will know which individual or entity has bought a property.
Since they also have a previous record, it will be easy to find out who has more than one property. Tracing this information and your yearly income, they can find out if there is an addition in the income and find out its source.
2. Land Registry: The HMRC is also in contact with the HM Land Registry, which is the record keeper of all the properties in the country. It can discover all the properties bought and sold in England and Wales.
3. Through Estate Agents: As the estate agents work at the ground level, the HMRC is also in contact with them. Through them, they can find out about unreported rental activity. Using this information, the HMRC can trace the property and find the owner.
4. Security Deposit Transactions: In case a landlord is renting out their property as a shorthold tenancy, they must file a deposit. This is required under the government tenancy deposit scheme. The HMRC also has access to these schemes and can obtain the information needed through these schemes.
5. Through the Electoral Register: Every citizen’s records are submitted into the National Electoral Register. Registration into this portal is made through the National Insurance number. The HMRC can trace back every property to its owner using this number and the information in the Electoral Register.
6. Informants and Reports: The HMRC pays attention to the reports and information supplied by the informants against landlords. These informants can be anyone from a tenant to neighbours, partners, etc.
These are the six ways used by the HMRC to find out about rental properties and their owners. As the HMRC has access to income tax and other databases, they can easily trace every piece of information about an individual or entity and find out if there is any unreported income flowing into their accounts.
What If Someone Doesn’t Pay the Rental Income Tax?
The only way you won’t pay the rental income tax is by not declaring the rental properties. Failing to pay the requisite tax, the HMRC can claim up to 20 years worth of income tax from that individual.
If you think that you are spending the majority of your rental income on property maintenance, renovations, repairs, etc., you can submit your case to the HMRC. The requisite authorities will evaluate your case and make a decision accordingly.
HMRC Let Property Campaign
Since 2013, HMRC has made efforts to ensure tax compliance among UK landlords and property investors through the Let Property Campaign (LPC).
This initiative has resulted in the recovery of over a quarter of a billion pounds for the government. The LPC has identified that approximately 1.5 million properties were being underpaid or not paying accurate amounts of taxes.
When it comes to residential property landlords, it is essential to proactively fulfill tax obligations. Failure to do so can result in significant consequences.
If you are a commercial property, investor or landlord, it is crucial to disclose your rental income and stay updated with your tax responsibilities.
What is the Let Property Campaign or LPC?
HM Revenue and Customs (HMRC) has implemented the Let Property Campaign to encourage residential property landlords to declare their rental income and resolve any tax issues. This initiative applies to landlords renting out properties in the UK or abroad.
By voluntarily disclosing rental income, individuals can avoid penalties that would have been imposed by HMRC during a tax investigation. The Let Property Campaign is an effective way to address any discrepancies in tax affairs and ensure compliance. It is advisable for landlords to take advantage of this initiative to avoid potential penalties.
It is important to promptly inform HMRC about any undeclared rental income and profits to demonstrate that the omission was unintentional. By doing so, you may be eligible for reduced penalties.
It is worth noting that HMRC has access to multiple channels to identify residential landlords and property investors. Therefore, if you decide not to disclose, the likelihood of being discovered is high.
When you make a disclosure and notify HMRC, they typically provide a 90-day period for resolving undisclosed taxes and making the necessary payments. HMRC tends to impose lower penalties if the non-disclosure disclose unpaid taxes was a result of carelessness rather than deliberate intent.
It may be beneficial to seek assistance from tax professionals or accountants to help mitigate the penalties imposed by HMRC.
When making a disclosure, it is important to declare any income that you may not have previously informed HMRC about, particularly income tax. This includes any untaxed income you have received, such offshore income such as investment income or rental income from land or non-residential property.
Additionally, inheritance tax and capital gains derived from the sale of investments, such as stocks, bonds, shares, goodwill, land, or property, should also be reported.
Who Should Take Part in the Let Property Campaign?
The Let Property Campaign is targeted towards landlords or investors who own residential properties. If you fall into this category, you may be under LPC.
- Rentor of a single property
- Rentor of multiple properties
- Renting out a room in your main home for more than the Rent a Room Scheme limit
- Living abroad yet renting out a property in the UK
- Living in Britain yet letting out residential property abroad
- Holiday lettings that you also use
When your annual gross rental income reaches £1,000 or exceeds it, you must inform HMRC. If it surpasses £2,500, you are obligated to register for self-assessment.
Who Should Not Take Part in the Let Property Campaign?
The Let Property Campaign is not applicable to the rental of non-residential or commercial properties. This campaign is for residential properties.
If you are a trust or a company letting out a property in the UK or disclosing rental profits on their behalf, the Let Property Campaign disclosure does not apply to you.
However, you have the option to request an alternative disclosure opportunity from HMRC. This is specifically designed for commercial landlords, trustees, directors of companies, or trusts.
How Many Years are Included in Your Disclosure to LPC?
The time limits for disclosing and paying property income taxes vary depending on the circumstances behind the initial non-declaration or underpayment of tax liability.
If the reasons were unintentional, such as making errors or careless mistakes, the taxpayer may have taken reasonable care but simply made mistakes. However, deliberate avoidance of tax obligations is a different scenario. The specific time limits for disclosure and payment will depend on the nature of the non-compliance.
When it comes to making a disclosure to HMRC, it is important to understand your position and owe tax, in relation to the following factors. You have a legal obligation to inform HMRC about any unpaid tax or incorrect payments by October 5th at the end of each tax year. You are given a maximum of 20 years to settle your tax responsibilities with HMRC.
If you have consistently maintained a good track record of staying on top of your financial responsibilities, including timely registration for self-assessment, accurate tax calculations, and overall carefulness, but have unfortunately made an unintentional error resulting in underpayment, you may be liable for outstanding tax payments for a period of up to four years.
If you have made careless mistakes when registering for self-assessment tax returns and paid an insufficient amount despite exercising reasonable care previous tax return, HMRC can require you to pay them for a period of up to six years.
Deliberately underpaying taxes, underreporting income, or not disclosing business information to HMRC is considered tax evasion. The consequences can be severe, with HMRC able to demand payment for up to tax years to 20 years of unpaid taxes. It is important to fulfill tax obligations to avoid these serious consequences.
How to Take Part in the Let Property Campaign?
When you register for voluntary disclosure of your letting income with HMRC, you are informing them of your intention to address your tax obligations. After registration, HMRC will send you a confirmation letter within 15 days. This letter will include your disclosure reference number (DRN) for future correspondence.
HMRC requires individuals to fill out a disclosure form within a 90-day period to declare any undeclared income. This includes undisclosed income, arising tax, as well as additional tax, interest, and penalties. It is crucial to ensure that your disclosure is thoroughly examined for completeness and accuracy. It is essential to have a clear understanding of the reasons for potential penalties before submitting the form.
If you need assistance in calculating your liabilities to HMRC, it is recommended to engage the services of accountants. In order to settle your debts, you can submit a disclosure form along with a formal offer of payment. Payment can be made in a lump sum on the same day as your disclosure, or you can opt for a payment plan.
Acceptance or rejection:
HMRC has the authority to either accept or reject your formal offer. It is important to cooperate with them by providing any additional information they may require and assisting them throughout the process to improve your chances of acceptance.
What are the Penalties for Undisclosed Income?
Tax penalties can vary in severity depending on the specific situation. Individuals who unintentionally make errors and disclose income, may not have to pay any penalties. However, deliberate non-disclosure, which is considered tax evasion, can result in larger penalties and even criminal prosecution. It is important to comply with tax regulations to avoid facing additional penalties, which could have serious consequences.
In cases where individuals fail to register for a self-assessment tax return but can demonstrate no intent to hide their property rental information from HMRC, the penalty range typically falls within 10%. It is important to note that penalties can vary and should be assessed on a case-by-case basis.
If you are discovered to have intentionally deceived or concealed your income from HMRC in order to avoid paying taxes or the accurate amount owed, you may face a more severe penalty range, potentially reaching up to 35%. It is important to accurately report your income to avoid such consequences.
How to Reduce the Penalties in Let Property Campaign?
In the UK, landlords and property investors are eligible for reductions in penalties from HMRC if they voluntarily disclose under the Let Property Campaign (LPC) and have a valid reason or circumstance. This provides them with favorable treatment and the opportunity to address any issues they may have.
Working with an accountant or tax professional is highly recommended for maximizing Let Property Income disclosure. These experts possess in-depth knowledge of the LPC process and ensure your compliance at every stage. They can greatly assist in securing tax credits and minimizing penalties to the lowest possible extent. Their expertise proves invaluable in optimizing the benefits of Let Property Income disclosure.
What If HMRC Disagrees with the Disclosed Information?
There are several reasons why HMRC may disagree with your disclosed information. This could be due to incomplete information, inadequate record-keeping, or incorrect interest calculations. When HMRC disagrees with your disclosure, it can result in rejection and potentially trigger a tax compliance check. In such cases, you may face penalties without the mitigating power of the LPC.
Nudge Letter from HMRC
A nudge letter from the HMRC is a communication indicating the suspicion that you, as a residential property landlord, may not be reporting your rental income and paying the appropriate taxes, or potentially not paying them at all. LPC adopts a direct approach to combat tax evasion among landlords, making it highly unlikely to go undetected.
When you receive a nudge letter from HMRC, it’s important to take it seriously. HMRC generally sends these letters to individuals they suspect may have irregularities in their tax obligations. Regardless of your confidence in complying with regulations, it’s crucial to act promptly. Follow the steps of disclosure as mentioned in the letter to address any potential issues.
The HMRC has several responsibilities, and one of them is to figure out the rental income tax individuals and non-natural persons have to pay on their income.
Using their accessibility to different government organisations’ databases, they can identify the owners of the properties and trace their transactions to find if they are getting any rental income.
To help property owners come clean, the agency has also started a Let Property Campaign. Through this campaign, they are encouraging property owners to declare their rental income and get the advantages of self-declaration and avoid fines or penalties.