HMRC is Reviewing Landlords’ Tax Liabilities

Landlords have again become the focus of HMRC. The government department is currently using data from rent deposit schemes to assess the likely tax that should be declared on tax returns alongside identifying landlords who are not declaring any rent. 

Correspondence is being sent to landlords (often referred to as ‘nudge letters’), asking landlords to clarify their tax position. This type of investigation is one in which HMRC continues to invest its resources. HMRC has access to a wide range of data, with similar campaigns targeting landlords through Land Registry Data. Here it identifies current or previous ownership of more than one property, to assess if tax, including capital gains tax, should be declared.

How does HMRC use rent deposit scheme data?

It has been a legal requirement since 2007 in the UK for landlords to register tenants’ deposits with a government-approved scheme. 

These deposits typically represent five weeks rent (where annual rents are less than £50,000 or up to six weeks for amounts above this.) HMRC can use this data to estimate the annual rent charged, cross referencing this with the details provided on a tax submission. Where a person registered a deposit but hasn’t submitted a tax return, this will also be highlighted.  Where abnormalities are identified, HMRC is likely to contact the individual, requesting further information.

Replying to a HMRC nudge letter

When a letter is received from HMRC, the advice is always to reply to this within the time frame stipulated. Often, when HMRC does not receive a reply, it will open a formal enquiry into an individual’s tax affairs. An enquiry can cover all aspects of an individual’s income. Furthermore, if HMRC believe deliberate avoidance has occurred, it is permitted by law to investigate back 20 years and has the powers to undertake criminal investigations. 

In these circumstances, where additional taxes are due, higher penalties are usually charged by HMRC than those available through a disclosure letter. These penalties can be up to 100% of unpaid liabilities, or up to 200% where it is related to offshore income.

Tax advice to deal with HMRC investigations

Where tax has been withheld or underdeclared, the benefit of declaring this to HMRC under this type of disclosure is that any penalties applied will typically be more favourable with cooperation from a landlord. 

With several changes and reductions to the tax reliefs available for landlords in recent years, it is not surprising that many landlords submit incorrect self assessment tax returns. Some, including accidental landlords, may not even be fully aware of their tax liabilities and have not declared their rental income.

We recommend all landlords review their gross rents and check the correct amount of tax has been declared. Anyone receiving a letter from HMRC should reply to it within the given time limit and seek professional advice if they are unsure of how to respond. 

Ignoring the letter may lead to HMRC opening an official enquiry and, where they believe deliberate tax avoidance has taken place, the penalties can be severe. Voluntarily disclosing the information to HMRC in advance usually means that HMRC will treat you more leniently.

Minimising landlord tax

Given the changes to how landlords are taxed, which is resulting in a greater burden for many, reducing tax is a key issue for landlords. This, coupled with HMRC’s increased focus on landlord tax, means it is important to ensure that all tax submissions are accurate.  

With higher interest rates and reduced tax allowances available, it is prudent for landlords to ensure they are holding any assets as efficiently as possible.  This includes considering whether a limited company structure is more efficient than holding property personally. Whilst it may have previously been the case that a company structure was not tax efficient, with the above changes many landlords are finding that this now suits them better.

For landlords, there are several additional ownership structures which may provide a more tax efficient way of holding property. These include utilising spousal allowances and their potentially lower tax rates, family investment companies and trust structures.  A tax review with a professional advisor would allow landlords to consider all these options.

Summary 

The most important thing a landlord should do when receiving a letter from HMRC is to reply to it within the time limit provided. It will always be prudent to take advice from a property tax professional before replying, even if it is just to confirm that there is no tax to pay. 

With increased interest rates and diminishing tax reliefs, it would be pragmatic for all landlords to review their tax position and consider if alternative holding structures for their properties are now more tax efficient. Sound professional advice will not only help minimise the risk of a HMRC investigation; it will also help to ensure that a landlord’s tax liability is minimised as much as possible.

* John McCaffery is a Tax Partner at Chartered Accountants and Tax Adviser company Alexander & Co *

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