Let Property Rental Income Disclosure – What to do if you have undeclared rental income
Posted on 02 Oct 2024, by Jeremy Johnson
Over the years we have helped hundreds of people disclose income to HMRC that they either did not realise was taxable, or knew they should report, but they kept it hidden, or never got round to telling HMRC. Many of those disclosures have been in relation to rental income. In this article, we cover some of the common mistakes and misconceptions, the tax implications and the routes to disclosure in relation to rental income, including HMRC’s Let Property Campaign.
HMRC continues to uncover undeclared rental income and open enquiries, or send so-called ‘nudge letters’ to property owners, as there are still many people who need to fix past errors. The good news is that fixing the problems may not be as painful as you think. There are well trodden routes to disclosure and we can help you to navigate the process.
Common Mistakes
Many people become ‘accidental’ landlords. We have often seen cases where a person owns a property, meets a partner and moves in with them, but keeps their old property to rent out. In many cases, the rental income might be pretty close to the monthly mortgage, so the individual believes that they are not making a profit, therefore they have nothing to declare.
The problem is that, if the mortgage payments cover interest and capital, only the interest element is allowed as a deduction. Also, after a graduated phase in starting in 2017, from 2020 only a percentage of the interest expense is allowable as a deduction for tax purposes – often you will see this referred to as ‘Section 24 interest relief restriction’.
Therefore, there are some people who do not believe that they have a ‘cash’ profit, but who do actually have a profit for tax purposes. Also, unless the income is less than £1,000, even if there is no profit, property rental income should still be declared.
We have also seen confusion with the rent-a-room scheme. This is a scheme whereby if you rent a furnished room in the house you also live in, income of up to £7,500 per year is tax-free and does not need to be reported. However, this does not apply if you no longer live in the property and rent out the whole house instead – this is where a mistake is often made.
There is also sometimes confusion about non-UK property. If you live in the UK and are UK domiciled and have a property, for example, in Dubai and it is rented out, even if any local taxes are paid in Dubai, you must still report the income in the UK. For offshore properties, any tax paid abroad will usually be available to offset against your UK liability, but the rental business still needs to be declared in the UK.
Finally, there is sometimes confusion about what expenses are allowable against rental income, leading people to believe that there is no profit. Expenses like insurance, rental agent fees and general maintenance are typically allowable. In addition, repairs are usually allowable on a ‘like for like’ basis, so, if you replace a window with a similar window, this would usually be a ‘revenue’ expense. Improvements, however, are usually considered a ‘capital’ expense and are potentially only allowable against any capital gains on the eventual sale of the property – for example if you added an extension to the property while it was being rented out, that expense would not be allowable against your rental income.
Calculating Rental Profit
It is the profit from your rental business that is taxable. This will be the rental income, minus any permitted revenue expenses, like those outlined in the section above. A deduction is also allowed for a proportion of the mortgage interest expense.
Any profit from the rental business should be included in a self-assessment tax return, along with all other income and the tax is then calculated on the overall position.
A loss in a year can’t be offset against PAYE or self-employed income, but it can carry forward and be used against profits of a later year. For example, if, in the first year of renting a property, a loss of £3,000 is made, this would carry forward to year 2. If in year 2 a £5,000 profit is made, the £3,000 loss from year 1 can be set against that, reducing profit to £2,000 for tax purposes.
Routes to Disclosure
HMRC has a number of ways that you can disclose income that has previously been unreported.
The most likely route for rental income will be the ‘Let Property Campaign’. Once registered for the campaign, there is a period of 90 days within which the calculations must be done and the disclosure submitted to HMRC. Usually, payment in full is required at the time of the final submission, but if time to pay is needed, this can be negotiated. Penalties will depend on behaviours, but unprompted disclosures, where you go to HMRC before they come asking, always have a lower penalty.
If the property is offshore, the Worldwide Disclosure Facility is probably the right option.
If the disclosure is more serious, for example you are a landlord who has had many properties over a number of years, and you knew that you should have reported the income, but you did not, HMRC’s Code of Practice 9 (“COP9”), sometimes also known as the Contractual Disclosure Facility (“CDF”) might be a sensible route for disclosure. The advantage is that, for serious cases, if you are accepted into COP9, this provides immunity from prosecution.
More information on these disclosure facilities can be found:
How Many Years to Disclose?
How far back you need to go typically depends on what is called ‘behaviour’ – this is categorised as reasonable care, careless or deliberate. In turn, the period of disclosure runs for 4, 6 or 20 years from the end of the tax year in question in relation to each category. If you have never filed a tax return, this is known as ‘failure to notify’ and HMRC can go back 20 years. For offshore matters some time limits are extended.
Many property disclosures are, in our experience, careless rather than deliberate.
How Can We Help?
We have helped hundreds of people over the years with disclosures of all kinds, including many let property disclosures. Our friendly team can guide you through the process, get you registered to disclose, calculate the tax and argue for the lowest possible penalties. If you have now realised that you have a problem, we can help you fix it. By providing clear advice and removing the unknowns, we can significantly reduce the stress of the disclosure process.
You can get in touch with our friendly and experienced team on: 0203 675 8122 or email jeremy.johnson@intaxltd.com.
InTAX is a specialist tax disputes firm. We deal with disclosures, investigations, and tax enquiries of all descriptions, including COP9, fraud investigations, VAT fraud, tax avoidance, let property disclosures and tribunal appeals. But we don’t just deal with the serious end of tax investigations; we are also happy to handle smaller enquiries, disputes and problems that can be equally as worrying for our clients.
