Buy to let landlords have confessed to evading tax on rental income by underpaying an average £4,480 each in the last tax year.
That’s a massive 72% more than they admitted in dodging the year before, according to research by accountancy firm UHY Hacker Young.
Hundreds of thousands of landlords told the firm that they deliberately underpay tax despite an ongoing campaign by HM Revenue & Customs encouraging them to pay the right amount of tax each year.
But landlords continue to ignore threats and warnings from HMRC.
HMRC has even set up a technology tracker that cross references financial information supplied by letting agents, holiday letting web sites, bank accounts and tax returns.
HMRC warns that landlords could face tax inquiries going back up to 20 years if they are caught evading tax on rental profits.
- 1 HMRC chases down £142 million ‘lost’ property tax
- 2 Deferred tax due by January 31
- 3 Property allowance warning
- 4 Phasing mortgage interest tax relief ends
- 5 Landlord self-assessment FAQ
HMRC chases down £142 million ‘lost’ property tax
Offending landlords may face criminal investigations and in the past five years 48,000 have had to pay an extra £142 million in taxes after the tax man caught them cheating over their tax returns.
One landlord was jailed for two years after evading £59,000 tax on 26 rental homes over five years.
An investigation also snared another landlord who had dodged £280,000 in tax on 17 rental homes. He was jailed for two years and fined £200,000.
Clive Gawthorpe, a tax partner at UHY, said: “When landlords who are hiding income get a warning letter from HMRC, they realise that HMRC is closing in on them and they can no longer hide.
“HMRC is giving landlords a chance to confess and in return, it will lessen the penalties imposed. This will be the most favourable outcome for landlords and any with undisclosed income ought to take that opportunity before it’s too late.
“If a landlord decides to come forward under the campaign, it’s better to do it with professional advice, particularly if their tax affairs are complex. This will be key in helping avoid any mistakes and the possibility of further investigations by HMRC.”
Deferred tax due by January 31
Although tax evasion is a criminal offence, tax avoidance by arranging your finances in such a way you pay less to HMRC is not.
This timely reminder comes as the self-assessment tax return countdown ticks on towards the deadline at midnight on January 31. By the deadline landlords should have filed their tax returns online and paid any taxes due on rental profits or gains from selling property.
The deadline is a double whammy – not only is a balancing payment and first instalment of next year’s income tax due, but any deferred tax payment from July 2020 under COVID rules is also due.
Under COVID rules, landlords struggling financially because of the impact of coronavirus on their rental business could elect to put off paying their July self-assessment instalment until January 31, 2021.
Providing the payment is made by January 31, 2021, HMRC will not charge interest or penalties.
If your deferred tax remains unpaid, HMRC is offering time to pay and will consider consolidating the debt with any tax due on January 31.
Property allowance warning
HMRC says around 11 million people must file a self-assessment tax return each year and around half race to complete the online forms during January.
If landlords collect annual gross property income of £1,000 or less, they do not need to tell HMRC about their income.
For gross rents between £1,000 and £2,500, contact HMRC and for rents over £2,500, file a self-assessment return.
You cannot use the £1,000 property allowance if:
- The rent comes from a company, partnership or employer of someone connected with you, like a spouse or civil partner
- To offset mortgage finance costs
- The rent comes from a lodger in your own hone, in which case you should use the Rent A Room Scheme
Phasing mortgage interest tax relief ends
The controversial mortgage interest tax relief phasing in comes to an end this year.
For this tax filing, landlords can claim 25% of mortgage and other finance interest as an expense and credit 20% of the remaining 75% of the amount paid against tax.
From the next tax year, for returns due in January 2022, only the 20% tax credit may be applied.
This change potentially increases landlord taxes, especially for higher rate and additional rate taxpayers who can only offset 20% of their mortgage interest rather than 40% or 45%.
The change could also snare more landlords in a higher rate tax bracket as the tax-relieved money used to pay the mortgage now becomes income.
Landlord self-assessment FAQ
Can I delay paying tax because of COVID?
No. The government allowed taxpayers to defer their payments in July 2020 providing they were paid by January 31, 2021 but has offered no similar arrangements for the current tax filing.
Under the current rules, the deferred payment plus those due on January 31, 2021, should be paid by midnight on that date.
Anyone struggling to find the money can speak to HMRC about time to pay.
Can I keep mortgage tax relief by trading as a company?
In theory landlords can retain their mortgage interest relief by incorporating their property business, but this comes with associated costs, like the costs of forming and managing a company and higher mortgage rates incurred by companies.
Before switching trading status, speak to a tax professional who will lay out the costs for you.
Is the property allowance the same as the trading allowance?
No, they are separate reliefs. The trading allowance is aimed at casual, self-employed workers with earnings of less than £1,000 a year.
The property allowance removes landlords earning less than £1,000 a year from the tax net – but note it is £1,000 a year gross rents from all properties, not per property.
I don’t owe any tax, do I need to file a return?
If HMRC has asked you to file a return, you must complete the self-assessment forms and post them online by the midnight January 31 deadline. If you don’t, you will pick up a £100 automatic fine regardless of how much tax you owe or if you are due a refund.