1. What is the HMRC Let Property Campaign?
The Let Property Campaign is an HMRC disclosure facility for individual landlords who owe tax because they have not previously declared all of their residential property income.
It can apply to landlords with UK or overseas residential property.
The purpose of the campaign is to allow landlords to bring historic tax affairs up to date by declaring previously undisclosed income, calculating the additional tax, interest and any penalties due and making an offer to HMRC to settle the position.
HMRC – Let Property Campaign: guide to making a disclosure
2. Who can use the Let Property Campaign?
The campaign is primarily available to individual landlords with undeclared residential property income.
This can include someone who:
- rents out one property;
- owns several rental properties;
- rents out a room in their main home above the relevant Rent a Room Scheme threshold;
- has income from residential property overseas;
- lives abroad but receives rent from UK residential property; or
- inherited a property and subsequently rented it out.
The Let Property Campaign is not generally the appropriate disclosure facility for rental income belonging to a company or trust.
3. What if I did not realise that I had to declare my rental income?
This is a common concern.
The fact that you did not understand the tax rules does not necessarily prevent you from using the Let Property Campaign.
However, why the income was not declared is extremely important.
HMRC will consider whether you took reasonable care, were careless, deliberately failed to declare the income or failed to notify HMRC of your liability.
This can affect both the number of years included in the disclosure and the amount of any penalty.
4. How far back can HMRC go for undeclared rental income?
There is no single answer that applies to every landlord.
HMRC's current Let Property Campaign guidance explains that the period can depend upon the circumstances and behaviour involved.
Where an error occurred despite the taxpayer taking reasonable care, the disclosure may be limited to a maximum of 4 years.
For careless behaviour, HMRC can generally look back up to 6 years.
Where the behaviour was deliberate, the period can potentially extend to 20 years.
A failure to notify HMRC of a tax liability can also potentially result in liabilities going back as far as 20 years.
It is therefore important to establish the correct behaviour and statutory position before simply preparing a 20-year calculation.
5. I have not declared rental income for 10 years. What should I do?
The first step is to establish the facts rather than immediately contacting HMRC with figures.
You should consider when the property was first rented, the rental income received, expenses incurred, whether you were already within Self Assessment and why the income was not previously reported.
It will then be possible to determine which years should properly be included in a disclosure.
A 10-year period of undeclared rental income does not automatically mean that all 10 years are assessable. The correct period depends upon the applicable tax rules and the circumstances that resulted in the failure.
6. Can HMRC find out that I own a rental property?
Landlords should not assume that HMRC will remain unaware of rental income simply because it has not appeared on a tax return.
HMRC has extensive information-gathering and data-matching capabilities and may obtain information from various sources as part of its compliance activities.
The important practical distinction is that making a disclosure before HMRC identifies the issue can result in a different penalty position from waiting until HMRC contacts you.
7. Is it better to approach HMRC before they contact me?
Generally, making a complete voluntary disclosure before HMRC identifies the issue can produce a more favourable penalty position.
HMRC distinguishes between unprompted and prompted disclosures when determining penalties.
The timing of the disclosure can therefore matter.
If you already know that rental income has not been correctly reported, waiting for HMRC to contact you may reduce the opportunity to obtain the benefit associated with an unprompted disclosure.
8. What happens if HMRC has already written to me?
Do not assume that you should automatically use the Let Property Campaign.
The appropriate route depends upon what HMRC's letter says.
If HMRC has already opened an enquiry or compliance check into the relevant tax affairs, HMRC's guidance indicates that the disclosure may need to be made directly to the officer conducting that investigation rather than through the Let Property Campaign.
The correspondence should therefore be reviewed before deciding how to respond.
9. How long do I have to make the disclosure?
The process normally starts by notifying HMRC that you intend to make a Let Property Campaign disclosure.
You do not need to provide the complete calculation when making the initial notification.
HMRC will issue a Disclosure Reference Number and payment reference.
Under HMRC's current guidance, the completed disclosure must generally be submitted within 90 days of the date you receive HMRC's acknowledgement of your notification.
It is therefore sensible to start gathering records as soon as possible.
10. What if I no longer have all my rental records?
Missing records do not necessarily prevent a disclosure from being made.
Historic rental accounts can sometimes be reconstructed using:
- bank statements;
- mortgage statements;
- letting-agent statements;
- tenancy agreements;
- insurance records;
- invoices;
- property management records; and
- other available evidence.
HMRC's guidance recognises that estimates may sometimes be necessary where records cannot be obtained.
However, HMRC may ask how an estimate was calculated. Any reconstruction should therefore be reasonable and supported by the available evidence.
11. Do I pay tax on the total rent received?
Normally, tax is charged on the taxable property profit, rather than simply the gross rent received.
Allowable expenditure therefore needs to be identified.
Depending upon the circumstances and relevant tax year, deductions can potentially include costs such as letting-agent fees, insurance, repairs and maintenance, professional fees, service charges and other expenses incurred for the property business.
Care is required because not every property expense is deductible and the rules governing residential finance costs have changed over time.
12. Can I claim repairs and improvements to the property?
There is an important distinction between repairs and capital improvements.
The cost of repairing and maintaining a rental property may potentially be deductible when calculating property income.
Expenditure that improves the property or creates a capital asset may instead be capital expenditure and will not normally be deductible from rental income in the same way.
The distinction can be particularly important where substantial refurbishment work has been undertaken.
13. Can I deduct my mortgage payments from rental income?
Not necessarily.
A mortgage payment can contain both repayment of the capital borrowed and interest.
In addition, the tax treatment of residential property finance costs has changed significantly over time.
A historic disclosure covering several tax years therefore needs to apply the rules relevant to each particular year, rather than simply deducting the mortgage payments from the rent received.
14. What penalties can HMRC charge for undeclared rental income?
There is no single fixed penalty for undeclared rental income.
The penalty can depend upon matters including:
- what went wrong;
- whether a tax return was inaccurate or there was a failure to notify HMRC;
- whether the behaviour was careless or deliberate;
- whether the disclosure was prompted or unprompted;
- the quality of the disclosure; and
- whether the liability involves an offshore matter.
For inaccuracies in tax returns, the relevant penalty legislation is principally contained in Schedule 24 Finance Act 2007.
Failure-to-notify penalties are principally contained in Schedule 41 Finance Act 2008.
The correct penalty should therefore be calculated from the particular facts rather than simply accepting the maximum percentage.
Finance Act 2007 – Schedule 24
Finance Act 2008 – Schedule 41
15. Will I have to pay interest as well as tax?
Usually, yes.
Where tax should have been paid previously, HMRC will normally charge late-payment interest from the date the tax should originally have been paid until settlement.
A Let Property Campaign disclosure therefore generally calculates:
Tax + interest + any applicable penalty.
16. What if the property is jointly owned by husband and wife?
The tax position needs to be considered for each individual owner.
HMRC's Let Property Campaign guidance specifically states that more than one person's liabilities cannot be included on a single disclosure.
For example, where a husband and wife both have undisclosed rental income, HMRC requires separate disclosures showing each person's appropriate share.
The underlying ownership and taxation of the rental income should therefore be established before preparing the disclosures.
17. Can overseas rental income be disclosed?
Yes.
HMRC's Let Property Campaign can cover undeclared income from residential property situated outside the UK where the individual has a UK tax liability.
Overseas property can create additional complexities, including residence, foreign tax, Double Taxation Agreement relief and offshore penalty rules.
Professional advice can therefore be particularly important where foreign property is involved.
18. Do I need to disclose other undeclared income as well?
Potentially, yes.
HMRC's current guidance states that a condition of participating in the Let Property Campaign is that the disclosure includes other income and gains that have not previously been disclosed.
This can potentially include other business income, investment income, non-residential property income and taxable capital gains.
A disclosure should therefore consider the taxpayer's overall historic tax position, rather than looking at the rental property completely in isolation.
19. What if I sold a rental property and did not declare the capital gain?
This should be reviewed as part of establishing the overall disclosure position.
Selling a property can create a Capital Gains Tax (CGT) liability separate from the Income Tax payable on rental profits.
HMRC's Let Property Campaign guidance specifically identifies previously undisclosed capital gains as liabilities that may need to be included.
The historic acquisition cost, sale proceeds, enhancement expenditure, incidental costs and available reliefs should therefore be considered before calculating the CGT.
20. What if I cannot afford to pay HMRC?
Do not ignore the disclosure because you cannot immediately pay the full liability.
HMRC's current guidance says that if you cannot pay the full amount, you should contact HMRC before submitting the disclosure to discuss your financial position and potential payment arrangements.
The disclosure itself still needs to be prepared correctly.
21. Will HMRC automatically accept my disclosure?
No.
HMRC reviews disclosures made under the Let Property Campaign.
HMRC states that it expects the majority of complete disclosures to be accepted, but it can ask questions or request supporting evidence.
Where HMRC considers a disclosure to be materially incorrect or incomplete, it can investigate further and potentially seek higher penalties.
It is therefore important that the disclosure is complete and that the calculations and explanations can be supported.
22. Could HMRC prosecute me for undeclared rental income?
HMRC's Let Property Campaign guidance warns that taxpayers who fail to disclose unpaid tax and are subsequently identified could face higher penalties or potentially criminal investigation.
That does not mean that every case of undeclared rental income is a criminal matter.
HMRC's approach will depend on the particular facts and seriousness of the conduct.
Where there is concern about deliberate tax fraud or significant historic non-compliance, specialist advice should be obtained before making a disclosure.
23. Should I make the disclosure myself or use a tax adviser?
HMRC allows individuals to make their own disclosures.
Straightforward cases may be capable of being dealt with without specialist representation.
However, professional assistance can be particularly valuable where:
- several years are involved;
- historic records are incomplete;
- more than one property is involved;
- HMRC has already made contact;
- the landlord failed to register for Self Assessment;
- careless or deliberate behaviour needs to be considered;
- significant penalties could arise;
- overseas property is involved;
- there are undisclosed capital gains or other income; or
- substantial amounts of tax are potentially at stake.
The objective should be to make a complete and accurate disclosure, while ensuring that the tax, years, interest and penalties included are those properly due.
24. What can GSC Tax Consultancy do for me?
GSC Tax Consultancy can manage the Let Property Campaign process from beginning to end.
This can include establishing the appropriate disclosure route, notifying HMRC, reconstructing historic property accounts, calculating taxable rental profits, identifying allowable expenses, calculating tax and interest, determining the appropriate number of years, analysing behaviour and penalties, preparing the disclosure and dealing directly with HMRC.
Where HMRC has already contacted you, we can also review the correspondence and determine whether the matter should be dealt with through the Let Property Campaign or as part of an existing HMRC investigation.
Our experience includes former senior HMRC tax investigation and compliance specialists, giving us an understanding of both the technical tax position and how HMRC approaches disclosures and investigations.
Need Help With Undeclared Rental Income?
If you are concerned that rental income has not been correctly declared, dealing with the position before HMRC identifies the issue can be important.
Contact GSC Tax Consultancy for a confidential initial discussion about your rental income and the HMRC Let Property Campaign.
This article provides general information only. The correct tax treatment, assessment period and penalty position depend upon the individual circumstances and professional advice should be obtained where appropriate.