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The great landlord tax clampdown

HMRC is targeting landlords with its latest campaign, reports Andy Matthews, partner at the national law firm, Gateley.

Andy Matthews

landlord tax clampdownIf your landlords (or even your own firm) have single properties, multiple properties, or, in particular, student properties, then it is highly likely you’ll be contacted by the taxman within the next 18 months.

This is following the organisation’s discovery that fewer than 500,000 landlord tax payers are registered with HMRC, when the figure should be nearer 1.4 million.

Having issued several warnings to non- paying landlords, in December 2013 HMRC launched its Let Property campaign to track down those failing to disclose their rental income in the correct manner.

EVASION

There are many reasons why landlords evade tax, both purposefully and unintentionally.

Landlords – and some letting agents – may misunderstand the rules of registration, and therefore fail to pay the right amount of tax. Often individuals who inherit property, which they subsequently offer for rent, fail to register, as well as those whose rental properties are mortgage free. Whatever the case may be, evasion is illegal and Revenue and Customs are on a mission to crack down on those breaking the law.

Whether taxpaying errors are due to misunderstanding the rules, or deliberate avoidance of paying the right amount, the Let Property campaign is a chance for landlords to notify HMRC, as opposed to waiting until they uncover the errors. Throughout the course of the amnesty-style scheme, landlords are being given a window of opportunity to declare the entirety of their rental income. Failure to do so could result in higher penalties and even criminal prosecution.

The issue of evasion is gaining significance and not just because of the taxman’s greater interest. Following the financial crisis – and the stagnant property market that followed – a significant number of people became ‘accidental landlords,’ having moved but been unable to sell their previous home.

A surge of the recovery in property values – particularly in London and the South – also means that people now selling could have a capital gain to declare.

TAXMAN MAY BE ‘GENTLE’

HMRC believes that the majority of missing registrations lie with these ‘accidental landlords’ who have moved house, been unable to sell their previous home and put it up for rent. Individuals who believe, on reflection, that they owe tax for undeclared income, now have the opportunity to contact HMRC and suggest how much their penalty should be. Each and every case is different, and the amount owed will depend on the circumstances of rental. Regardless of circumstance, voluntary disclosure is encouraged during the campaign and penalties are likely to be less than they would have been previous to the amnesty.

By making a voluntary disclosure, the Let Property campaign not only allows landlords to bring their tax affairs up-to- date, but it ensures they get the best possible terms to pay the tax owed. On account of the expensive penalties enforced upon those who fail to declare rental income, a disclosure during this campaign could, in the longterm, be extremely cost- effective for landlords up and down the country.

WHO SHOULD DECLARE?

Landlords of every type are required to register with HMRC including:

  • Landlords renting out a single property
  • Landlords renting out multiple properties
  • Specialist landlords, such as those managing student or workforce rentals
  • Citizens living abroad and renting out a property in the UK
  • Citizens living in the UK and renting a property abroad
  • Those renting out a holiday home even if they use it themselves.

Even homeowners renting out a spare room for more than £4,250 per annum must register with HMRC, despite the fact they remain permanent residents in the property. This is a mistake often made and one that owes the Government millions.

Unfortunately, commercial property landlords, as well as firms or trusts that rent residential properties cannot take advantage of the scheme.

HOW WILL HMRC TRACK DOWN NONPAYERS?

The Government organisation has a number of tools at its disposal. The first approach likely to be taken is the one used by tax authorities to investigate their own records. For instance, using data about taxpayers’ declared income and other assets, allows HMRC to identify divisions of the population likely to own properties in addition to the homes they reside in.

Following this broad approach, HMRC can target suspect groups and individuals. For example, taxpayers’ records can be cross-checked with Land Registry data and, if necessary, data can be requested from third parties such as lettings agents. Banks are another source of information, as HMRC can freely access information surrounding mortgages advanced to landlords.

HMRC’s campaigns give the public a chance to come clean before we near the next phase of the Let Property campaign – now’s the time to act.

And Matthews - Partner, Gateley

And Matthews – Partner, Gateley

Gateley has property and tax teams available to advise on matters such as these. Gateley is a top 50 national UK law firm with 150 partners and more than 400 fee earners. It operates from offices in Birmingham, Edinburgh, Glasgow, Leeds, Leicester, London, Manchester, Nottingham, and Dubai. www.gateleyuk.com

March 20, 2014

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