We are seeing more and more people come forward to declare rental income that previously had not been included on their tax return.
More often than not, this is being triggered by letters sent out by HMRC.
HMRC now have direct access to HM Land Registry and so are easily comparing land records with individuals’ tax returns. They are specifically seeking landlords with undeclared rental income, or capital gains.
These enquiries often cover a large number of tax years, with 10 years+ not being uncommon. The reason for this surge in the number of investigations is that this is the first time that HMRC have taken a joined up approach in relation to identifying potential undeclared rental income.
Issues to Consider
Dealing with a HMRC investigation is not an easy thing and can cause stress and worry, as well as the significant financial cost.
However, when dealt with in the right way, your tax agent can act as the conduit for all communication with HMRC and will help you to understand your position, your rights and of course to assist with the minimisation of the tax and other payments that may become due.
The sooner you act to resolve the problem, the easier it will be all round.
Common Misunderstandings
Sometimes, tax enquiries and under declarations result from a misconception about the rules for declaring and paying the tax.
Here are just a few errors which commonly come up from the phone calls we receive:
I do not declare my rental income because I am making a loss
I did not declare my second home sale because it is not rented out
We own a property as husband and wife and split the income and gains however we wish each year
I am on PAYE – I assume my rental income was taxed through the payroll
The property I rent out or I sold is abroad, so I did not declare it in the UK
My property is abroad and foreign tax was paid instead
I thought my managing agent dealt with my taxes
Key Steps
There are a few key steps you should follow if you receive a letter, or feel you may have income or gains that are undeclared:
1. Approach your tax adviser, or consider appointing one as soon as possible.
2. HMRC impose deadlines for a response, do not wait until the last minute to deal with the letter or even worse, ignore it.
3. Don’t be tempted to tell HMRC you have nothing to declare, even if you think the undeclared income is minimal, or there is even a loss.
4. If you have other undeclared income besides property, take this opportunity to make full disclosure.
5. Begin gathering all necessary paperwork immediately. Often this is initially what your adviser will need to begin to consider your position.
Likely Consequences
If it turns out that you have failed to declare income or gains, you will of course have to pay the tax that was originally due. In addition to this, interest and penalties will be due. Interest is charged at a set rate, currently 3% APR since November 2017.
Penalties will also be charged in most cases. The rate of penalty charged will depend on a number of factors including whether your disclosure was prompted (HMRC wrote to you first), how much you co-operated and assisted with the enquiry, and whether they consider your error was caused by careless, negligent, or deliberate behaviour.
Commonly, penalties are charged at 15% - 65% of the amount of tax, depending on these circumstances. Custodial sentences are possible, but only in the very most severe of cases.
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