How do you make sure that you don’t get caught out by failing to declare your rental income to HMRC?

Renting property is not illegal, but HMRC will treat it as such if you fail to report it correctly. This means that if you rent out your home, you must declare any rental income to HMRC.

It’s important to understand how HMRC knows about rental income because it has huge implications for landlords who rent out properties. In fact, if you don’t declare rental income, you may face fines of £10,000 per year.

If you’ve never declared rental income before, then read this article to find out how HMRC knows about your rental income. Then make sure you get everything correct from the beginning.

Step 1: Understand the rental income rules and regulations

In the UK, landlords must declare their rental income according to the ‘cash basis’ standard. This means that they should consider all rent payments that are due to them, even if they have not yet received them.

Additionally, landlords may be eligible to claim any unpaid rent as an expense against their rental income or a bad debt in certain cases.

Just like with any other business income, landlords must count and declare their rental income accurately for HMRC purposes.

It is important for landlords to understand these rules and regulations in order to avoid getting caught out by HMRC’s tax inspections.

Step 2: Learn about Making Tax Digital (2024)

The new digital tax changes that are being introduced in 2024 will have a big impact on landlords. Landlords will need to use a cloud-based accounting system for their rental properties in order to be compliant with the new rules.

These changes could make it harder for landlords to keep track of their finances and make it more difficult to comply with the law. You can read more on this in our recent article: Landlords Affected By The New Digital Tax Changes in 2024

Step 3: Make sure you understand the tax reliefs available to you

Renting out a property can be a lucrative endeavour and those who do so may seek to make the most of their profits.

To maximise profit from renting out a property, it is important to be aware of the tax reliefs available. The buy-to-let tax system, which was phased in over several years, replaced the old system where only a percentage of mortgage interest payments could be deducted from rental income before paying taxes. As of April 2017, all mortgage interest payments are entitled to 20% tax relief.

The new mortgage tax rules that came into effect in April 2017 may have an impact on landlords depending on their income bracket.

Additionally, deductions for mortgage interest payments are no longer allowed, so landlords need to factor this into their calculations when determining their potential tax burden.

There are also Capital Gains Tax considerations when selling a property, which is why it’s advisable to seek professional advice at that point.

It is important to note that HMRC will be aware of any rental income undeclared, and they use various methods such as comparison with previous years or information from third parties like letting agents or local authorities to catch out those not declaring all of their rental income correctly.

Step 4: Section 24 – Understand how it affects Landlords

Section 24 was announced in 2015 and refers to a change in tax law that affects the amount of tax relief landlords receive. The amendment was phased in gradually but came into full force in April 2020.

Before Section 24 was introduced, you could deduct mortgage interest from your income tax bill. You could also deduct other costs related to rental properties, such as mortgage admin fees or loans to pay for furniture.

Now, you’ll need to pay tax on all the rental income you receive. You can then claim back mortgage interest costs but only up to 20% (the basic rate of income tax).

Step 5: Understand the Inheritance Tax rules

It is important to understand the Inheritance Tax rules when it comes to renting out property in order to avoid incurring any unexpected financial penalties from HMRC.

Knowing the applicable rules and calculating one’s tax liabilities with precision can help taxpayers ensure that they are up-to-date on their rental income payments, helping them remain in compliance with regulations and avoiding costly fines or other repercussions.

Consulting an accountant for advice is always recommended before approaching HMRC about undeclared rental income. I can highly recommend our accountant – Chris from UHY.

Step 6: Be aware of the Class 2 National Insurance payments

Class 2 National Insurance is a tax imposed by HMRC on profits earned from renting out property. It applies to profits over £6,475 per year and must be paid in order to be eligible for a full state pension.

Failure to pay this tax can result in hefty fines or other penalties from the HMRC, so it’s important for landlords to understand their obligations and make sure they comply with the rules.

To avoid getting caught out, property owners should make sure that they are familiar with how HMRC knows about undeclared rental income and take all necessary measures to ensure that their taxes are properly accounted for.

Step 7: Keep records of your rental income and expenses

It is important for individuals to keep records of their rental income and expenses in order to avoid potential tax problems.

Accurate records must be kept for a minimum of six years, and should include both hard copies and computerised records. Failure to maintain thorough record keeping may result in delays when filing taxes, inaccurate reporting, and more complex issues down the road.

Additionally, individuals cannot use past losses from rental properties against future profits in the same tax year; rather, losses can only be offset against other income earned that same year.

I used to dread filing all the documents for our properties. But I find it easier now to just get it done when the paperwork comes in.

I have a series of spreadsheets and binders to keep the records electronically and manually. This makes it easier to send to our accountant. 

This will be important to keep on top off when you need to abide by the Making Tax Digital changes in 2024.

Step 8: Respond to any letters from HMRC promptly

The significance of responding to letters from HMRC promptly is that it can help taxpayers avoid penalties and interest charges, as well as protect their privacy rights and financial interests.

Failing to respond in the allotted timeframe could result in legal action being taken against the taxpayer.

Keeping records of all correspondence with HMRC, including any documents that are relevant to the case, will also help prove innocence if challenged by HMRC at a later date.

Step 9: Consider seeking professional advice from a property tax advisor if needed

It is highly recommended to seek professional advice from a property tax advisor when dealing with rental income.

A property tax advisor can provide valuable insight into the details of taxation surrounding rental properties, such as applicable deductions and liabilities.

They can identify areas that could be improved to minimise tax liability, and they can also help in filing returns correctly and dealing with disputes should any arise.

Additionally, a property tax advisor can help manage portfolios through all stages of the process – from buying to selling properties.

Ultimately, obtaining professional advice will ensure an individual’s exposure to taxes is minimised while taking full advantage of all applicable deductions and exemptions.

As I mentioned above, I highly recommend our accountant: Chris from UHY.

FAQs

What is rental income?

Rental income is the amount of money a landlord receives in rent and other payments from tenants for services typically provided by a landlord, such as cleaning, repairs, and utilities. If the rental expenses are higher than the rental income, then the landlord has made a loss.

For those who are basic rate taxpayers, 20% of their rental profits get added to their other income for the tax year.

However, no National Insurance is paid on rental profit; this is collected under self-assessment usually by 31 January each year.

When it comes to HMRC knowing about undeclared rental income, landlords should be aware that HMRC carries out regular checks through various methods such as records from banks or credit card companies or information received from third parties.

They also may collect data from Land Registry sales which lists every house bought and sold since 2000 with details about how much was paid for it along with details of any mortgages taken out against it.

Additionally, they use algorithms to compare rents declared against those that could reasonably be expected in an area using data sources including census results and local authority housing benefit information. It’s important to make sure all your accounts are up-to-date if you want to avoid getting caught out by HMRC when they come calling.

What are the implications of not disclosing rental income?

The potential consequences of not disclosing rental income to HMRC can be severe. If HMRC suspects that a landlord is not reporting their rental income, they may contact them and request additional information within thirty days. If a landlord fails to respond within this period, then HMRC may take appropriate action such as seizing their property or filing a civil lawsuit against them.

Furthermore, if landlords do not disclose their rental income, they face the risk of higher penalties or criminal prosecution from the HMRC. Therefore, it is important for landlords to make sure that they accurately declare all of their rental income in order to avoid any potential legal issues.

How can I make sure I don’t get caught out?

Individuals must take extra caution when it comes to declaring rental income, as HMRC has multiple ways of finding out about undeclared income.

It is important that individuals who are landlords and make any profits from rental properties fill out a self-assessment form each year, even if they don’t usually file taxes and their rental income exceeds certain thresholds.

Retired individuals or those living abroad must also submit a self-assessment form. If individuals suspect they might have cheated on their taxes, they should seek advice immediately in order to avoid higher penalties.

The Let Property Campaign provides an opportunity for individuals to declare any previously undisclosed property incomes.

What information do I need to disclose?

In order to avoid potential legal issues, individuals must make a fully accurate and honest disclosure to HMRC.

This requires an individual to have a Government Gateway account and be able to use the appropriate calculator, depending on how many years of unpaid tax is owed. Additionally, if more time is needed to pay, it is important for individuals to contact HMRC’s helpline before their 90-day deadline arrives.

What is the disclosure facility?

The Disclosure Facility is a way for taxpayers to inform HMRC about their finances without having to wait for the tax authority’s agreement.

The facility allows taxpayers to submit information about any undeclared rental income, and if they are not able to make full payment at once, HMRC will work with them on an individual basis in order to come up with a solution. In certain cases of genuine hardship, HMRC may allow relief in the form of leniency.

What is the campaign about?

The HMRC Let Property Campaign is designed to help landlords who have underpaid tax in the past. It encourages them to come forward and report undeclared rental income, and provides a step-by-step guide on how to fix any issues with their taxes. 

What are the risks of not disclosing rental income?

The risks of not disclosing rental income on taxes are significant. HMRC has the resources to track down any undeclared rental income, and failure to declare it could result in back-dated tax bills, fines, or even criminal prosecution.

Landlords may be given the opportunity to disclose any rental income they have neglected to pay taxes on through HMRC’s Let Property Campaign, which offers better terms than if they were investigated.

What should I do if I haven’t declared rental income?

Not declaring rental income can have serious consequences with HMRC, such as a back-dated tax bill, fines, or even criminal prosecution.

HMRC has many resources available to them to detect and track down any undeclared rental income. Therefore, it is important for individuals to double check with HMRC before making any decisions regarding their rental income in order to avoid repercussions.

When investing in property it’s important to submit your self assessments to HMRC in a timely manner. Work with your accountant to do this and you will not get into trouble and find yourself with a large tax bill.  You can also read more about how the HMRC knows about undeclared rental income in our recent article.