HMRC crackdown on non taxpaying landlords

The growth in the number of UK landlords, currently estimated at between 1.2 and 1.4 Million, may be seen as a side effect of the recession, with lower incomes relative to house prices, and many unable to afford the large deposits required. One thing is certain, HM Revenue and Customs are not happy with the fact that only 500,000 taxpayers are registered with them as owning rental properties.

Many people become second homeowners accidentally, either by inheriting property or again due to the recession not being able to sell their home when moving to a new area, and deciding to rent out the original property until the market improves. If you do become the owner of two properties then I would suggest you speak to your accountant, not just about any potential tax liabilities, but also due to the fact that it is often wise to make an election with HMRC telling them which property is your main home (your principal private residence), as this is the one which will receive full tax relief when you come to sell it.

I recently met a couple who had been gifted a property from the wife’s father who then continued to live in the property until he died. They wanted to sell the property but were concerned with the amount of tax payable. There are a huge amount of tax implications of this transaction, including the fact that the father would still have been classed as owning the property on death for inheritance tax purposes, as you cannot give something away and still have the benefit of using it. There was also the issue of establishing what the cost of the property was for the couple when calculating how much the profit was on sale.  Fortunately by utilising the combined legislation for capital gains tax and inheritance tax we were able to wipe out any potential tax liability for the couple.

HM Revenue & Customs Crackdown

Over the past few years H M Revenue & Customs have run various campaigns to encourage people to disclose rental income or gains on properties which are not their main home. These campaigns allow property owners to come clean and pay the tax due often without penalties. Unfortunately once the campaigns are over and HMRC track you down, apart from the tax payable there are also significant penalties and interest charges.

Detailed below are some of the tools HMRC are using to track down those property owners not declaring the income:

• Firstly, the broad-brush approach. HRMC’s own records of declared income and other assets will identify those segments of the population who are likely to own properties in addition to their own homes;
• Land Registry data is the next obvious weapon at HMRC’s disposal. They can cross-check taxpayers’ records and easily identify those who own more than one property;
• HMRC can also request information from third parties such as letting agents and banks for mortgage information.  These organisations have an obligation to supply information when asked;
• The system of tenancy deposit schemes, designed to protect tenant’s rental deposits introduced in 2007 has given HMRC an easy way to identify landlords. The schemes collate data about landlords and properties which are accessible to all tax officials;
• Finally landlords themselves are shouting out about their properties by advertising in local newspapers and on the internet.

Whether landlords are making profits or losses on their property rentals, if they do not disclose the income to HMRC on their annual tax return then it is going to be expensive when HMRC catch up with them.

Author Neil Roberts

If you would like to discuss in more detail anything raised in this article, or would like to have a chat about your own personal circumstances, please contact one of our specialist tax team at your local office – click here for details of our offices.

Technical content correct at time of publishing.