“An Englishman’s home is his castle,” or so goes the oft-quoted adage…But what happens if you receive an unexpected Let Property Campaign letter from HMRC which states you may have underpaid tax?
For many people a buoyant property market is the principal barometer of the health of the economy and the meteoric rise of buy-to-let properties and the ever-enduring popularity of Kirsty and Phil attest to this.
Surely, it is a no-brainer? Buy a property, let it out and rest easy whilst the mortgage is paid off by someone else.
Unfortunately, the complex world of UK tax legislation is never quite so simple and many taxpayers have mistakenly not paid the relevant tax along the way…
Calculation of Rental Profits
Whether you are a landlord of a single flat, a vast property empire or simply own a furnished holiday home, you are responsible for disclosing and paying income tax on your rental property profits to HM Revenue and Customs (HMRC).
A common error is where individuals assume that as the outgoings in respect of the rental property exceed the income there are no profits to pay tax upon.
In many instances, the difference between income and outgoings will be negligible due to large mortgage repayments, however, many taxpayers are unaware these payments are not fully deductible for tax purposes.
Only the interest elements are allowable deductions for tax purposes and from 6 April 2017 onwards, the relief on interest payments is restricted so that in future years landlords may only receive a credit at the basic rate of tax (20%).
From HMRC’s point of view, the remaining equity payments are connected to the capital costs of the business.
Repairs, utility bills and insurance premiums are of course deductible but if you are uncertain of the tax implications please get in touch and we will be happy to help.
Let Property Campaign
As part of a recent drive to encourage individuals to become up to date with their tax affairs, HMRC has introduced the Let Property Campaign.
The Let Property Campaign is aimed at landlords of residential properties who have perhaps neglected to notify HMRC of rental profits from their let properties.
It is an opportunity for these landlords to settle their tax liabilities on the best possible terms.
If you are a landlord and you have undisclosed income you must tell HMRC about any unpaid tax right away to secure the most beneficial treatment.
Currently, the maximum penalty for owners of UK residential properties is 100% of the unpaid tax. These penalties are reduced where individuals make “unprompted disclosures” to HMRC i.e. without any communication or letters from HMRC.
Luckily, there are lots of positives to consider as the letters from HMRC apply a rather broad sweep and even though they have got in touch it does not mean you will necessarily have tax to pay.
For example:
- You may have substantial mortgage interest which is relievable;
- Wear and tear allowance from previous years, and
- Insurance, utilities, council tax are also all relievable;
Furthermore, in recent years a £1,000 Property Allowance was also introduced which we may be able to claim on your behalf.
Whether you wish to disclose your rental property profits via the Let Property Campaign or you may wish to re-structure your property business into a more tax-efficient structure, we are here to help.