Since 2013, HMRC has been closely looking into UK landlords’ and property investors’ tax compliance by launching the Let Property Campaign (LPC), successfully clawing back a quarter of a billion pounds and more to the government. 1.5 million properties landlords were found to have been underpaying or not paying exact amounts of their taxes.
Residential property landlords are pressured to proactively get on track with their tax obligations or else they face serious consequences. If you are a property investor or a landlord, disclosing your rental income and keeping up to date with your tax responsibilities is crucial.
In this article, we provide you with the most comprehensive guide to understanding your tax liability as a landlord. This article on the Let Property Campaign covers who should or not declare their rental income, the years you need to disclose your income, steps on taking part in the campaign, the penalty range for not declaring your rental income, how you can mitigate the penalties, what to do once you receive a nudge letter from the HMRC, and how HMRC is tipped off that you are a landlord or a property investor.
What is the Let Property Campaign or LPC?
HM Revenue and Customs (HMRC) has implemented an effective disclosure initiative to encourage residential property landlords to declare their rental income and straighten up their tax affairs, whether they are letting out their property in the UK or abroad, through the Let Property Campaign.
The Let Property Campaign allows you to disclose your rental income before HMRC suspects you of being tax non-compliant and makes tax investigations. Voluntary disclosure is the best way to mitigate the penalties HMRC would have imposed if they made the tax compliance check and discovered any discrepancy on your part.
Once you have any undeclared rental profits, make sure to notify HMRC straight away to show that your actions were non deliberate, so you can take advantage of having your penalties reduced. Take note that HMRC has various sources to know that you are a residential landlord or property investor, which means if you choose not to disclose, it will be inevitable getting caught out.
When you make a disclosure and notify HMRC, the latter will then give you 90 days to resolve your undisclosed taxes on the best possible terms and pay what you owe. They usually limit their penalties if it was simply due to carelessness on your part and non deliberate. You may also want to work alongside tax professionals or accountants on this matter to buffer the penalties HMRC demands.
When you make a disclosure, you are to provide any income you did not tell HMRC about in the previous tax years, specifically income tax. Other incomes to declare include your income that’s untaxed before obtaining it, investment income that’s untaxed before you receive it, rental income from land or non-residential property, inheritance tax, and capital gains you earned from disposing of your investments (e.g., stocks, bonds, shares, goodwill, land, or property).
Who Should Take Part in the LPC?
Let Property Campaign focuses on individual residential property landlords or investors. You may be under LPC if you are any of the following:
- Rentor of a single property
- Rentor of multiple properties
- A specialist landlord (e.g., student or workforce rentals)
- 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 already exceeds the property allowance threshold of £1,000, you will need to let HMRC know about it. If it exceeds £2,500, you are required to register for self-assessment.
Who Should Not Take Part in the LPC?
You are not to take part in the Let Property Campaign when you rent out non-residential properties, or commercial properties, such as the following:
If you are a trust or a company letting out a property in the UK or disclosing rental profits on behalf of any of these, the Let Property Campaign disclosure doesn’t apply to you as well. However, you can ask HMRC for an alternative disclosure opportunity that works for you as a commercial landlord, trustee, or director of a company or a trust.
How Many Years are Included in Your Disclosure to LPC?
The time limits you will need to disclose and pay for your property income depends on the reason you didn’t declare it in the first place or didn’t pay the right amount of tax, whether deliberate or non deliberate. It could be that you take reasonable care of your taxes but you simply made some errors, made careless mistakes, or are deliberately avoiding your obligation.
When you make a disclosure to HMRC, make sure you know where you fit in with any of these. You are supposedly obliged to inform HMRC about your unpaid tax or the incorrectly paid amount by the fifth of October at the conclusion of each tax year. 20 years is the maximum for paying HMRC your tax responsibilities.
If you have a good track record of keeping your affairs up to date carefully, which means you have registered for self-assessment at the given deadline, worked out your taxes with reasonable care, and yet made a non deliberate mistake of underpaying, you owe tax for up to 4 years.
In case you made careless mistakes, such that you registered for self-assessment tax returns yet paid so little despite taking reasonable care, you’re bound to pay HMRC for up to 6 years.
Lastly, if you deliberately underpaid your taxes, reported less than your actual income, or told nothing about your business to HMRC, this would be considered as evading your obligations, resulting in more serious consequences. HMRC might impose your payment for up to 20 years.
Steps to Take Part in the Let Property Campaign
The same steps apply to everyone regardless of whether HMRC sends you a nudge letter, which will be discussed in the latter part of this article, or you make a disclosure. Either way, the steps are as follows:
Registration: This signifies you are notifying HMRC that you want to voluntarily disclose your letting income and sort out your tax affairs. Within 15 days, HMRC will write back to you as receipt confirmation and attach your disclosure reference number (DRN).
Disclosure: HMRC gives you 90 days to disclose any undeclared income through a disclosure form, including undisclosed income, arising tax, and additional tax interest and penalties. Make sure that you submit your disclosure only when you have scrupulously checked it is complete and correct and you are fully aware of why you are being penalised.
Payment: Work out what you owe to HMRC with the help of accountants. Make a formal offer of the amount you believe you should pay in the disclosure form and settle your payments. You can opt to pay the same day you have completed your disclosure in a lump sum or establish payment plans.
Acceptance or rejection: HMRC may either accept or reject your formal offer. Be sure to provide them with further information if they request it and help them with the process as much as you can.
What are the Penalties for Undisclosed Income?
Additional tax penalties range from mild to serious, depending on your circumstance. Some may not have to pay at all, especially if their actions were non deliberate, but in more serious cases such as deliberate non-disclosure, otherwise considered as tax evasion, one may be penalised with a larger amount; even worse, they might even face criminal prosecution.
The percentage of penalty ranges from 0% to 30%. If you failed to register for a self-assessment tax return but are proven to have no intentions to conceal your property rental information to HMRC, your penalty range may just be around 10%.
However, when you are found to be originally misleading or hiding your income from HMRC to avoid paying taxes or the exact amount you owe, you are at risk of a higher penalty range which could be up to 35%.
How to Reduce the Penalties in LPC?
Landlords and investors of a property in the UK are given consideration by HMRC, too, by allowing reductions to their range of penalties, especially when they voluntarily disclose under the LPC and have a good quality reason or circumstance.
The best way to make the best out of Let Property Income disclosure is to work with an accountant or tax professional. These experts know the ins and outs of LPC and will make sure that you comply with the process appropriately every step of the way. They can significantly help you get tax credits and mitigate your penalties to as low as they can get.
What to Do If You Have Received Nudge Letter from HMRC
A nudge letter from the HMRC signifies that they suspect you are a residential property landlord who are not declaring your income and paying your taxes with the right amount or even not at all. LPC’s straightforward approach strives to thoroughly eliminate tax evasion amongst properties landlords, so it is relatively impossible not to get caught.
HMRC only sends a nudge letter to those who they genuinely suspect are having irregularities on their tax obligations. So, once you receive one, no matter how confident you are that you have been thoroughly complying with the regulations, act on it right away and follow the steps of disclosure as mentioned above.
Where Does HMRC Get Its Information?
HMRC gets information from a myriad of resources, basically everywhere. They take hints from your footprints, such as your land registry, and take tip-offs from a wide network. Aside from the land registry, they can access details from the following:
- Local authorities for council tax
- Utility companies
- Mortgage applications
- Third parties (e.g., letting agents, tenant searchers, internet-based letting services, etc.)
Furthermore, with a very sophisticated connect system, HMRC is well able to analyse your information and accurately determine if you are not paying the right amount of your tax due.
What If HMRC Disagrees with the Disclosed Information?
There are various reasons that HMRC disagrees with your disclosed information. They may find your information incomplete, fail to keep appropriate records, or provide wrong calculations of interest. Once they disagree with your disclosure details, this ultimately leads to rejection, and you might have to go through their tax compliance check and obtain penalties without the mitigating power of LPC.
How Can Legend Financial Help?
Whether you are sent a nudge letter, are anticipating or facing tax enquiries, or are voluntarily disclosing your information, our accountants at Legend Financial are here to guide you throughout the disclosure process through our face-to-face or digital disclosure service, aside from reading this guide on the Let Property Campaign.
We make sure to reduce all factors as much as possible and reduce your penalties, serving as your buffer with HMRC. We will do the process on your behalf, so you don’t have to worry about dealing with HMRC and their complex regulations. Reach us today!
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