HMRC letters for landlords not declaring income

There’s no denying that HMRC is adept at finding new ways to make people pay their taxes. Last year we wrote about how its Behavioural Insights Team (or ‘Nudge Unit’) brings behavioural psychology to its communications. Now landlords who may not have declared their income are receiving HMRC letters asking them to pay up.

How HMRC finds out about undeclared landlords

You may be aware that HMRC can request information about you from a wide range of sources. This is done by issuing a Financial Institution Notice.

Thanks to these powers, the taxman can now request information from other government departments and banks. Crucially for undeclared landlords, HMRC can also request information from the various tenancy deposit schemes.

When you let a property, you need to put your tenant’s deposit in a government-approved tenancy deposit scheme. At the end of the tenancy, the tenant either gets the whole deposit back, or some or all of it is used to cover the costs of damage or unpaid rent or bills.

Because lodging a deposit with a tenancy deposit scheme is a legal requirement, the vast majority of landlords do it. However, not all of these landlords declare their rental income to HMRC. Often this is because they have become ‘accidental landlords’. This generally happens when someone can’t sell a property and have to rent it out instead.

However, HMRC is currently requesting financial information from tenancy deposit schemes. If someone is registered as a landlord with one of these schemes, but they don’t declare rental income via a Self-Assessment Tax Return, they are likely to receive a letter asking them to pay tax and penalties.

HMRC calculates how much landlords owe

Landlords are currently allowed to ask for a maximum of five weeks’ deposit for new or renewed tenancies (if the rent is under £50,000 per year). HMRC knows that most landlords take the maximum deposit and then lodge it with a tenancy deposit scheme.

So, if HMRC learns that you have taken a deposit of £1,500, it will assume you have a rental income of £300 per week or £15,600.

What do the HMRC letters say?

HMRC letters say that it has received information that suggests a person needs to review their tax position. They also enclose a certificate of tax position which it asks landlords to complete and return.

However, these certificates are very simple. For example, they don’t allow you to account for periods when a property was vacant or any reductions in rent.

There is no legal requirement to complete the certificate of tax position. However, if you are a landlord and you haven’t declared rental income, it is a good idea to talk your accountant so you can review your tax position correctly.

What happens if I ignore HMRC’s letter?

If you do receive an HMRC nudge letter, don’t ignore it unless you are absolutely sure you have correctly declared your rental income in your tax returns. Since HMRC launched its Let Property Campaign in 2013, some 58,000 disclosures have been made, netting the taxman approximately £250 million.

If you receive a nudge letter, you’re likely to be offered a discounted penalty in return for declaring any undeclared rental income over the last 20 years. Fail to declare and you can be hit with penalties ranging between 10% and 100% of rental income, plus interest.

As you can see, if you are an undisclosed landlord, now is a good time to regularise your tax affairs. If you don’t, the chances are that HMRC will track you down using your financial records. If you’d like any help sorting out your tax affairs, please talk to your THP account manager today.