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Undeclared Rental Income, Landlords and HMRC

Regardless of the size of your property portfolio, the number of years you have had your door open to tenants, or the number of tenancies you have seen through, it’s safe to say that most landlords can agree that the somewhat excessive bureaucracy and paperwork, although necessary, is far from the most glamorous or exciting aspect of letting out a rental property.

If you are in receipt of a rental income you will be required to declare the appropriate amount to HMRC, however, whilst this can certainly be a daunting task for new or accidental landlords it has recently been revealed that a surprisingly vast amount of landlords in the UK neglected to accurately report their earning to this governmental body last year.

It is certainly understandable how in recent times mistakes can be made as countless businesses across many industries have crammed to adapt to the challenges that have presented themselves in recent years, yet HMRC has reported that thousands of property investors and landlords have neglected to be honest about any amounts they should have paid in tax over the 2020-2021 financial year.  The figures show that the amount of investors that have voluntarily divulged the amount of tax they have yet to pay to HMRC has plummeted by 42%, with as many as 7,578 property investors coming clean about their taxes in 2020, a number that has dwindled to only 4,330 for the most recent tax year, the lowest figure in seven years.

This is not to say that these revelations made by the government are anything new. Hailed by the UK government as an opportunity for landlords that have fallen behind in repaying their taxes to get “up to date with their affairs”, the “Let Property Campaign” was launched in 2013 and despite estimations that as much as £500m worth of tax was going undeclared and therefore unpaid by landlords annually, since its introduction the initiative has only been able to recoup £184m in missing tax payments.

The campaign allows landlords to back date their tax payments for up to 20 years, with those that fail to notify the governmental body of any amounts they should repay facing a monitory penalty. But this is not to say that those that choose to acknowledge their missing tax payments will be met with open arms, as they still face scrutiny as to why these amounts were not declared sooner, arguably encouraging some to see how long the issue can be ignored.  The “Let Property campaign” details that although the initiative “will be on going for some time, landlords intending to come forward who delay, risk higher penalties if they are subject to an enquiry and they have not already notified an intention to disclose… if the errors were due to misunderstanding the rules or deliberately avoiding pay the right amount it is better to come to HMRC and admit any inaccuracies.”

Whilst the scheme does go on to say that the specific amount a landlord or property investor can expect to repay will largely be informed by their reasoning as to why they have neglected to fully disclose the amount of rental income they have received; alongside any financial penalty the owner of the rental property may be landed with, they could also face criminal proceedings depending on the specific circumstance of their case.

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What Happens If Landlords Don’t Declare Their Rental Income?

If HMRC believes that a landlord is yet to settle any outstanding tax payments they will assess any information they already have available against the rental property owner’s tax history, whilst obtaining more sufficient information regarding their tax obligations through an enquiry. If the landlord has not made benefit of the Let Property Campaign the penalties they could face as a result of their undisclosed rental income could be significantly higher, with up to 100% of the unpaid amounts being charged, or 200% if there is found to be any related income offshore.

With this being said, it is of course possible that these errors made by the landlords could simply be a result of an honest mistake. If this is found to be the case, as can be expected the repercussions are far less severe. 

Tax Influences on the Rental Industry

With many changes being introduced to the UK’s rental landscape in regards to tax, many landlords have found these moves to be too far, encouraging them to sell up their rental properties and move on. Whilst the estate agency Hamptons has reported that since April 2016 over 700,000 homes have been purchased by rental property investors, they go on to estimate this figure could have been at least 36% higher if changes to tax regulates had been left by the wayside.  Stating that the surcharge stamp duty has placed on establishing a portfolio, alongside the heavily reduced mortgage interest relief landlord could enjoy on buy to let properties, has caused over quarter of a million landlords to leave the industry, further estimating that this loss has resulted in almost 250,000 properties going un-purchased over the last five years.

This has left the private rental sector in the UK into decline, with the industry being almost 10% smaller than its heyday in 2017. This has quickly left demand to far outstrip the supply of available rental properties within the country, resulting in rental charges for private properties to sour at their highest rate since early 2015, with an increase of 5.9% being witnessed.

Recent studies have shown that with lockdown only working to encourage those that would typically be bound to the necessity of living in the nation’s capital, flocking elsewhere in search of greener pastures has seen rent across London boroughs fall by an average of 2.6% as landlords scurry to maintain the appeal of their rental opportunities. Elsewhere in the nation, rental properties available in the South West of England have seen rental charges spike by 11.3%, alongside rental opportunities in the South East seeing an increase of just over 10%.

Whilst concerns about the accessibility of the private rental market have been in the spotlight for a number of years, these studies reveal that rent is now riding at a rate that is six times higher than inflation, only exacerbating the issue and causing a significantly higher financial barrier to those that wish to rent.

Whilst there are some expectations that as the nation emerges from months of lockdown measures the rental industry will see some tenants seek to return to the nation’s cities and industrial hubs. However with there being 45% less available rental opportunities in April 2021 than in the same month in 2019, with a fall of at least 50% in other regions of the nation, it is widely anticipated that this demand will only cause rental charges to increase further.

How Much Tax Should Landlords Pay?

The amount of tax a landlord is expected to pay each year is largely dictated by the amount of rental income they have received in the same period, if they have purchased any additional properties to expand their portfolio, or if any of their rental opportunities have been hosted on the market. However, despite the numerous tax payments a property owner must be aware of, there are also initiatives they are able to take advantage of to reduce their overall tax liability.

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What Deductions Can Landlords Make From Their Tax?

To the delight of all landlords, the amount of tax a rental property owner is obligated to pay each year can be significantly reduced, with unavoidable business expenses being taken into account and deducted from the amount the landlord is liable to pay to HMRC. These deductions will specifically relate to the amount of capital gains tax or CGT the property owner is legally required to pay.

Simply put a landlord will need to pay capital gains tax on the amount their rental property has increased in value when being taken to market. The exact amount of allowance the government grants before capital gains tax must be paid changes on an annual basis however for 2021 the amount is currently set at £12,300. This amount is knocked of the profits taken from the sale of the rental property, with a further 18% being paid in tax for those on basic rate, and 28% for those that must pay additional rates. Whatever amount is left after these deductions is the total amount of profit the landlord is able to keep from the sale of their rental property.

When placing the rental property on the market the owner is able to make deductions from the total amount of capital gains tax they must pay through providing ample evidence of any costs they may have incurred through having the property inspected prior to the sale, any fees charged by the letting or estate agent, solicitors fees, buy to let mortgage dealers and perhaps most significantly of all, any amounts they had to pay in stamp duty when purchasing the property.

Further to this, if the owner of the rental property has carried out extensive maintenance works or renovations to the property the owner is able to make additional deductions to offset these costs from the amount of capital gains tax they are obligated to pay. With this being said, it is possible for landlords to make a claim for these deductions when completing their income tax returns, and if they choose to do so cannot be repeatedly claimed for when trying to reduce their capital gains tax liability.  

With this being said, landlords are of course not only exclusively required to pay capital gains tax, and must also pay a premium on the amount of rental income they receive. All landlords that are receiving a rental income must complete a self-assessment tax return, detailing the profit they are making from letting their rental out to tenants. However, there are some instances in which landlords will not be required to complete this tax assessment, primarily if the amount of rental income they receive from their property is lower than £1000 each year. But, it goes without saying that for the overwhelming majority of property investors, landlords and rental property owners in the UK the amount of rental income they receive per anum will exceed this threshold. There are a number of allowable expenses a landlord is able to deduct from their tax liability, however they must have been exclusively incurred as a result of letting out the rental property to tenants. Any amounts paid towards landlord insurance, maintenance and repairs to the rental property, utility bills and council tax, alongside accounting and property management fees, or staff wages can all be used to offet the amount of tax a landlord must pay on the rental income they receive.

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