HMRC Targets Landlords

HMRC Targets Landlords

From: Andrew Stephenson

With thanks to

Anthony Fisher MIPA, FABRP  Focus Insolvency Group
Senior Licensed Insolvency Practitioner

Hand holding House

HM Revenue & Customs (HMRC) have begun sending thousands of letters to landlords it suspects of bending the rules in order to pay less tax; increasing its scrutiny of buy-to-let investors.

An estimated 5,000 landlords have been sent letters already which give a 30 day window to respond and arrange their affairs before action is taken

A further 40,000 letters are expected to be sent over the next four months asking the recipient to make contact.

HMRC have been targeting property owners for the past three years but accountants have commented that HMRC’s campaign has seen a tougher approach over the past 12 months.

Tens of thousands of landlords are believed to be paying little or no tax on their rental income and capital gains made on second properties. £500m goes unpaid each year and it is understood that additional resources have been deployed to try and track these funds down.

Last October a campaign began to encourage landlords to come clean. As well as those with undeclared rental income, HMRC are also targeting Landlords who have filed inaccurate tax returns.

There has also been an increase in information gathering from wider sources, no longer concentrating just on the Land Registry and the electoral roll.

In April this year letters were sent to letting agents requesting the details of everyone on their books, housing benefit payments made direct to landlords are being examined more closely and social media is being increasingly utilised to look out for offers of holiday homes rented to friends and family. The letters being sent direct to landlords are the next step in this line of investigation.

Fewer than 500,000 taxpayers are currently registered with HMRC as owning a second property but it is estimated that the true number of landlords could be much higher at around 1.5 million.

A HMRC spokesman said that hundreds of thousands of people had visited its campaign website called ‘Let Property’ which also offers training to landlords on tax matter via online tutorials. It has not been disclosed how many landlords have come forward voluntarily since the campaign began.

The spokesman commented, “All rent from letting out a residential property or holiday home has to be declared for income tax purposes. Telling us is simple and straightforward. The message to all landlords owing tax is simple – it is better to come to us before we come to you.”

From HMRC Website:

Paying tax

When you start renting out property, you must tell HM Revenue and Customs (HMRC) and you may have to pay tax. If you don’t, you could be charged a penalty.

You can currently save money on tax you owe by reporting undeclared rental income to HMRC. You must be an individual landlord renting out residential property.

Property you personally own

You must report income from property rental of more than £2,500 a year on a Self Assessment tax return.

If it’s less than £2,500 a year, call the Self Assessment Helpline and ask for form P810.

Property owned by a company

Count the rental income the same way as any other business income.

Costs you can claim to reduce tax

There are different tax rules for:

  • residential properties
  • furnished holiday lettings
  • commercial properties

Residential properties

You or your company must pay tax on the profit you make from renting out the property, after deductions for ‘allowable expenses’.

Allowable expenses are things you need to spend money on in the day-to-day running of the property, like:

  • letting agents’ fees
  • legal fees for lets of a year or less, or for renewing a lease for less than 50 years
  • accountants’ fees
  • buildings and contents insurance
  • interest on property loans
  • maintenance and repairs to the property (but not improvements)
  • utility bills, like gas, water and electricity
  • rent, ground rent, service charges
  • Council Tax
  • services you pay for, like cleaning or gardening
  • other direct costs of letting the property, like phone calls, stationery and advertising

Allowable expenses don’t include ‘capital expenditure’ – like buying a property or renovating it beyond repairs to wear and tear.

Furnished residential lettings

You can claim 10% of the net rent as a ‘wear and tear allowance’ for furniture and equipment you provide with a furnished residential letting. Net rent is the rent received, less any costs you pay that a tenant would usually pay (eg Council Tax).

Furnished holiday lettings

For furnished holiday homes, you may be able to claim:

  • plant and machinery capital allowances on furniture, furnishings, etc in the let property, as well as on equipment used outside the property (like vans and tools)
  • Capital Gains Tax reliefs – Business Asset Rollover Relief, Entrepreneurs’ Relief, relief for gifts of business assets and relief for loans to traders

You can only claim these if all the following apply:

  • the property is offered to let for at least 210 days a year
  • it’s let for more than 105 days a year
  • no single let is more than 31 days
  • you charge the going rate for similar properties in the area (‘market value’)

If you own the property personally, your profits count as earnings for pension purposes.

Download ‘Helpsheet 252: Capital allowances and balancing charges’ (PDF, 184KB)

Commercial properties

You can claim plant and machinery capital allowances on some items if you rent out a commercial property – like a shop, garage or lock-up.

Working out your profit

You work out the net profit or loss for all your property lettings (except furnished holiday lettings) as if it’s a single business. To do this, you:

  • add together all your rental income
  • add together all your allowable expenses
  • take the expenses away from the income

Work out the profit or loss from furnished holiday lettings separately from any other rental business to make sure you only claim these tax advantages for eligible properties.

Losses

If you make a loss on renting, you can carry it forward to a later year and offset it against future profits. You can only offset losses against future profits in the same business.