What’s the issue?
HMRC realised that tax evasion on property lettings was widespread and calculated that one million buy-to-let and other private landlords were not declaring their rental income and so cheating the public coffers of at least £550m a year. Many are understood to be using inflated claims for letting expenses to pay less tax than they should. “A lot of people are knowingly not declaring,” said an HMRC spokesman. “We want to hammer down that £550m – it’s significant money.”
HMRC set up their Let Property Campaign (LPC) to encourage landlords to come clean, or risk higher penalties. As well as those with undeclared rental earnings from earlier years, the campaign is aimed at landlords who have filed inaccurate tax returns.
HMRC is using new more effective measures to identify landlords who have let property but not declared it on their tax return. Those whom they identify face having to pay all of the tax they should have paid plus interest plus penalties.
If someone receives a letter from HMRC about undisclosed property income then they must act quickly. This is known as a LPC prompted disclosure. There can be increased penalties for delay and HMRC has the power to bring criminal proceedings. If someone has undisclosed property income and has not yet received a letter from HMRC they should seriously consider making a LPC unprompted disclosure as there will be less interest and penalties to pay. Eventually HMRC will catch up with nearly everyone in their sights as so much unpaid tax is at stake.
Are all landlords dishonest?
Not at all. In the due diligence of taking on a new client it transpired that they had a shared property which had been let out for 15 years but the income on which had never been reported to HMRC. The omission is all too common – many people become accidental landlords to a single property through inheritance or circumstance when work takes them elsewhere and they rent out the main home. Sometimes there was very little profit made from renting a property out after expenses are taken into account – especially in the days of high interest rates prior to the dramatic fall in interest rates in 2008. Our client above came under the accidental landlord category.
Who could be caught as a landlord?
A landlord would be someone for example who is:
- renting out a single property
- renting out multiple properties
- a specialist landlord, eg for student or workforce rentals
- renting out a room in their main home for more than the Rent a Room Scheme threshold
- living abroad and renting out a property in the UK
- living in the UK and renting a property abroad
- renting out a holiday home even if used by him/herself
Some people don’t give the taxman any thought, or if fleetingly the tax on rental income is considered, it is put in the pending drawer and somehow it never seems to make its way to the top of the in-tray that year, or the year after or the year after…!
Such inaction does not make the issue go away, far from it, it just increases the exposure and risk year by year to eventual severe (even draconian) HMRC action.
What is the Let Property Campaign?
Thankfully, HMRC’s Let Property Campaign (LPC) can come to the rescue. Unlike many other HMRC campaigns, this one does not have an expiry date at the moment and so remains available. The Let Property Campaign is a way for anyone who has income from letting out a residential property to put their tax affairs in order and usually avoid the harshest of penalties and indeed the risk of possible criminal prosecution.
Landlords who come forward voluntarily with an unprompted disclosure under the LPC will still have to pay a penalty of up to 20% – plus the tax and interest – but this compares with prompted disclosure penalties of up to 100%, and even the possibility of prosecution.
HMRC has been ramping up its scrutiny of landlords. One Hertfordshire landlord who rented out and sold property evading £84,000 in tax was given a suspended one-year prison sentence. A Hampshire landlord was jailed for two years after failing to declare Capital Gains Tax of £157,000 on rental properties.
To participate in the Let Property Campaign an individual must have rental income to declare to HMRC. However many people are not aware that regardless of whether they make a profit or not then rental income needs to be declared to HMRC and the person should have registered for self-assessment and declared the profit (or loss) on their tax return.
The LPC is not just about putting an individual’s tax affairs right relating to the rental income. Although there must be rental income to take part in the Let Property Campaign, in using the campaign any other undisclosed income must also be declared. Thus if someone who is self-employed has also not declared all of their income from self-employment they should use the LPC to regularise all of their tax affairs.
How to take part in the Let Property Campaign?
The process is that HMRC is notified (by either the individual or their adviser) that the individual wishes to take part in the LPC and HMRC writes to them with a reference number and allows the individual three months to complete the disclosure. This is called an unprompted disclosure in that the individual volunteers to HMRC that they wish to declare rental income.
Periodically HMRC also obtains information regarding housing benefit or from letting agents (HMRC has the legal power to force local authorities or letting agents to provide this information) and HMRC will write to the individual to whom the rent is paid and invite them to take part in the LPC. This is called a prompted disclosure and (as noted above) has a higher penalty regime than unprompted disclosure.
Where there are reasonable records and only one property, then the three month deadline is reasonable where an experienced tax adviser is doing the calculation and preparing the rental income accounts. For more complex cases, although HMRC suggests three months, if it is going to take longer to complete the LPC forms then HMRC will agree to an extended period.
When the form is received by HMRC they are entitled to ask questions and may do so especially if anything appears out of the ordinary. The key is to submit good information that makes sense. Being dishonest in a LPC disclosure is seriously bad news. What surprises many people is that with the correct deduction of expenses, use of losses from void periods, and some legitimate tax planning going forward, the actual tax on rental income can be less than feared. The tapered restriction (from Apr 17) on allowability of mortgage interest on a property is something to be watched and calculated carefully. Tax planning around this may be useful.
HMRC is primarily only interested in receiving the LPC disclosure form if there is tax due. In some cases there will be losses (eg for void periods) but these should also be reported and disclosed on the self-assessment tax return to set against future profits. If the property has been rented out for many years then the LPC disclosure can protect the early years of non-disclosure from subsequent enquiry even if not all those early years are needed to be included in the LPC disclosure. This can be a complex area especially if a property has joint ownerships with different degrees of culpability of the owners. We have experience of this.
It must be remembered that for anyone taking part in the LPC they should ensure they register for self-assessment at the same time as they notify HMRC they are participating in the LPC.
For one of our clients, their situation was made especially complex by the perfect storm of joint holding of a property, missing old bank statements, incomplete records, transactions being muddled between their business and personal bank accounts, capital expenditure on the property and unoccupied periods causing losses. We were able to unravel their affairs and prepare sensible looking accounts for HMRC scrutiny.
Penalties
As well as disclosing undeclared rental income and calculating the tax due, the penalties must also be self-assessed using a complex culpability/penalty guide. Unfortunately the guide has flaws in it which HMRC concedes and thus we navigate around its shortcomings to get the best result for our clients. Applying the culpability/penalty rules can be more of an art than a science in determining where on the scale of Reasonable excuse/reasonable care taken; Non-deliberate/careless; Deliberate; and Deliberate and concealed, a client’s situation should be. We use our experience to put the client’s circumstances in the most favourable light.
HMRC queries on LPC disclosures
HMRC do sometimes raise queries on LPC disclosures but if the original disclosure is honest and reasonable then the queries can usually be resolved fairly easily. If the accounts have been prepared by a qualified accountant that is also likely to help.
Summary
The LPC is not a get out of jail card in that outstanding tax still needs to be paid but it is a more benign regime than if the taxman comes knocking. It can be especially valuable if the property has been rented out for quite some time. It is self-evident that of all the assets that a taxpayer may prefer HMRC not to see, a freehold property must be one of the more difficult ones to hide! Click for further details of the LPC.
Professional advice should usually be sought to navigate the journey to a successful outcome.
Testimonial
“David’s ability to sort out our tax affairs, which were admittedly in a serious mess and included undeclared rental income and unsubmitted tax returns going back years, was fantastic. I can’t thank him enough for getting us out of big trouble and avoiding the harshest penalties with HMRC. I even got a tax rebate – amazing! David is a magician!” – Confidential name
If you are interested in talking to us about your undisclosed let property income or want to get a custom quote then please don’t hesitate to get in touch. We are happy to have an initial complementary conversation with you.
david.eaton@smestrategies.co.uk 07841 215182