Key points:
- HMRC is convinced that there are very many landlords who are not paying tax on their rental income.
- A campaign has been started, intended to encourage residential property landlords across the UK to come forward.
- It seems likely that many people will find themselves subjected to unwelcome scrutiny, even if they are not liable.
HMRC apparently believes that there may be up to 1.5 million residential property landlords, who owe as much as £500 million in tax each year.
They have therefore initiated a campaign to ‘encourage’ them to come forward and make a full disclosure of the income, and to pay off any liabilities that are due.
While it seems unlikely that people reading a magazine entitled “Property Tax Insider” have neglected to deal with their property tax affairs, it might perhaps be interesting for readers to learn about some of the details behind the campaign and from where HMRC gains much of its information.
The campaign:
Tax advisers have been aware of HMRC’s growing interest in landlords for some time. We have previously mentioned “Property Tax Task Forces”, which have looked for high-volume landlords in specific areas of the UK, such as London and East Anglia, but HMRC’s interest in landlord activity appears to have developed over several years.
The campaign itself will last for around 18 months and during that time HMRC hopes that people will take the opportunity to bring their affairs up to date. HMRC thinks it has lots of information on suspected hidden landlords and says that it will soon start to contact those who haven’t come forward during the campaign.
The incentive is that if HMRC later finds that someone should have disclosed rental income under the campaign but didn’t, then significantly higher penalties are likely to be charged.
How Many?!
Given that there are roughly 20 million households in the UK, it seems highly unlikely that there could be 1.5 million ’hidden’ rental properties in the UK, let alone landlords.
While the estimated underpayment of £500 million is very substantial, it works out at little more than £300 per landlord, per year, which is hardly indicative of significant skulduggery.
It might also explain why HMRC has started a campaign, rather than open 1.5 million enquiries: aside from the lack of resource, the yield would not cover the cost.
If we suspend disbelief for a moment and consider how such large numbers might be made up, one or two points come to mind as to why HMRC might end up disappointed with the results.
Rent-a-room:
People ’taking in lodgers’ seem likely to make up a substantial proportion of HMRC’s target population. But rent-a-room relief is available when someone shares their home, which exempts up to £4,250 of gross income. It will in many cases be automatic; there is no need to fill in a tax return if the rental income is covered by the exemption.
No net profit:
Just because a property is let doesn’t mean there are taxable profits. There are many landlords whose incomes do not always cover all of their costs: they may be looking to benefit from capital appreciation in the long term, rather than enjoy guaranteed annual net income.
Personal allowance:
If any net rental income is covered by the tax-free personal allowance, then again there will be no tax liability. And in each of the last two cases, there is no legal obligation to notify HMRC of rental income if there is no net tax liability.
Trap:
Novice landlords often fail to appreciate that it is only the interest part of their mortgage repayments which is deductible against rental income, rather than the entire repayment (unless, of course, it’s an interest-only mortgage).
Revealing their sources:
HMRC uses various means to find out about landlords. Traditionally, tax inspectors have turned to local newspapers and similar publications, or looked through the portfolios of local estate agents. They would also make formal requests, using their statutory powers, for information from third parties such as the local council, to secure details of landlords who were being paid under Housing Benefit arrangements.
Now, of course, local knowledge has largely disappeared, as HMRC has centralised its operations and closed many of its offices. But HMRC has not lost its thirst for information; rather it has extended its operations and is using information technology to do much of the legwork.
Connecting the dots:
HMRC has built a database system it calls ’Connect’, which is designed to pull together information from various sources in order to highlight individuals who appear likely to have undisclosed wealth or income.
HMRC already held substantial amounts of personal information on taxpayers, such as PAYE and tax credit records, even if they had no tax return. Likewise, banks, building societies and other financial institutions have been obliged to provide details of interest payments made to investors for many years.
But HMRC has become much more adept at processing these huge reports and tying the data to taxpayer records. Those taxpayers who appear to enjoy significant investment income, but who have no obvious source for that wealth, are very much on HMRC’s radar.
There is also a lot of information which is freely available in the public domain: HMRC is now using specialised software to ’crawl’ the Internet, and websites advertising property to let provide rich seams of data to mine.
Finally, HMRC still uses its third-party information powers to request information, but over the last few years this appears to have been happening on an industrial scale; there have been numerous mentions of letting agents being approached for lists of landlords. It seems highly likely that this information is now being collated centrally using Connect, and tied in to individual taxpayer records – again to highlight apparent anomalies.
Misinformed – or misinterpreted?
Of course the pointers HMRC receives from its Connect system are only as good as the information fed into the system in the first place.
A key problem for HMRC is identifying who is actually the taxable person. HMRC has ready access to the Land Registry (note that land transaction returns include the buyer’s National Insurance number) but as many readers will know, the person or persons on the Land Registry are the legal owners, and not necessarily the person renting out the property.
The legislation says that tax is chargeable on the person receiving or entitled to the rental profits and, clearly, this could easily be someone other than the person whose name is on the Land Registry.
Conclusion:
Given the scale of the campaign, it seems highly likely that the campaign will potentially offer many landlords a relatively painless opportunity to get their tax affairs in order.
But it also seems likely that there will be many property owners who get to ’enjoy’ some unwelcome attention from HMRC, either because they do receive rental income but owe no tax on it, or because of informal letting/sub-letting arrangements they may not even be aware of.
It is important for taxpayers and HMRC to bear in mind that landlords are not automatically obliged to send in tax returns, nor are they automatically liable to tax, merely because they own a property.
Practical Tip:
Best advice would be to ensure that any relevant paperwork is kept safe, in case it is needed.
