HMRC currently estimates that there are around 700,000 landlords in the UK that make rental profits on which they pay no tax. This means they let out properties and do not declare any of the money they make from doing so and thereby evade paying tax. Not disclosing income is a serious offence that can lead to significant fines and criminal prosecution.
The Let Property Campaign originally started in Autumn 2013 and was set to last just 18 months. It was set up to offer landlords the opportunity to voluntarily pay taxes on any undisclosed income from property rentals with a reduced penalty fine. Now, nearly 10 years after its inception, there is still no indication that the campaign will end any time soon.
So what exactly is the Let Property Campaign? Who is it for? And how can you sign up to it if you need to?
We are going to explore the answers to all these questions and more as we dive into the Let Property Campaign.
The Let Property Campaign is an initiative that was created by HMRC that gives landlords who owe tax the opportunity to get up to date with their tax affairs. The campaign was designed to be quick and simple and allows landlords to take advantage of the best possible terms.
If you are a landlord and you have undisclosed property income - i.e. you owe tax - then you must inform HMRC immediately and make a voluntary disclosure. Once you have informed HMRC you have 90 days to calculate and pay everything you owe. If you voluntarily agree to pay tax on undisclosed income, the penalty your receive from HMRC will be significantly less than if you are discovered through an inspection.
So let's jump in and find out who the Let Property Campaign is made for.
The Let Property Campaign is for all landlords with undisclosed taxes who let out residential properties.
This includes landlords who:
- have multiple properties
- have only single rentals
- are specialist landlords, e.g. with students
- have holiday lettings
- rent out a room in their main home for more than the tax-free threshold of £7,500 per year
- have lived abroad or intend to live abroad for over 6 months and rent out a property in the UK.
The Let Property Campaign does not include landlords who let out non-residential properties such as:
- any property used for lock-up.
The Let Property Campaign also does not include landlords who want to disclose income on behalf of a trust or a company.
A landlord is anyone who lets out a property that they own under a lease or licence.
Landlords are categorised in the following ways:
- A short-term landlord is anyone who has let their property out for a period of fewer than 28 days.
- A long-term landlord is anyone who has let their property out for more than 28 days but less than 7 years.
- A letting agent or manager is a company that maintains and organises the letting arrangements of a landlord's property.
The tax-free threshold for paying tax on a single room rented out in the landlord's own residence is £7,500 per year. For example, if you let a spare room in your house to a lodger for £10,000 per year, then you would need to pay tax on £2,500 of the rental income.
The tax-free threshold for tax on a property rented out that is not the landlord's residence is £1,000 per year. For example, if you let out a whole property for £15,000 per year, you would need to pay tax on £14,000 of the rental income.
As we have seen, if you earn less than £1,000 per year from rental income then you pay no tax.
However, anything earned over the tax-free threshold is subject to UK Income Tax rates.
Any profit that you make from letting out a property contributes to your income and therefore contributes to the amount of Income Tax that you will pay.
So, if your income (including your rental income) is between £12,570 and £50,270 per year, then you will pay the Basic Rate of 20%. If your total income is between £50,271 and £150,000 per year, then you will pay the Higher Rate of 40% on all earnings over £50,270. If you earn over £150,000 per year then you will pay the Additional Rate of 45%.
There are, of course, expenses that come with managing and letting properties that do not contribute to your total income.
When calculating your expenses, it is important that you understand the difference between revenue and capital expenses.
- Revenue expenses relate to the daily running and maintenance of your property and can be deducted from your Income Tax bill.
- Capital expenses are expenses that will increase the overall value of the property. Capital expenses can’t be deducted from your Income Tax bill, but you may be able to deduct them from your Capital Gains Tax.
There are some expenses that you may regard as capital expenses but are actually considered to be revenue expenses. For example, double-glazing is no longer seen as capital improvement but a repair and therefore a revenue expense.
Any extra costs that are essential to you performing landlord duties can be deducted from your rental income and therefore reduce your tax liability. This might include:
- letting agents’ fees
- legal fees
- accountants’ fees
- buildings and contents insurance
- interest on any property loans
- money spent on maintenance and repairs (but not home improvements)
- utility bills
- rent, ground rent and service charges
- council tax
- services such as cleaning and gardening
- phone calls
- mileage and transport costs to inspect the property or carry out repairs
- courses that enhance your existing knowledge as a landlord
- wear and tear. Landlords can now deduct the total costs of replacing furniture, furnishings and kitchenware from their rental income.
Things that cannot be claimed as expenses include:
- mortgage repayments. You can claim interest payments on your mortgage as expenses but not the full repayment fees
- private calls. You can only claim expenses for calls relating to letting the property
- personal expenses. You cannot claim for any expense that wasn’t made solely for the purposes of your rental business.
HMRC is currently targeting tax evasion by residential landlords as it is estimated that undisclosed rental income is costing the government nearly £2 billion per year.
One report indicated that in some parts of the country HMRC had found up to 14 landlords per 100,000 population that had evaded tax on rental income.
Undisclosed income refers to any income source you have that has not been registered with HMRC. It is a legal requirement for tax to be paid on all income that exceeds certain thresholds.
If you realise you have income you need to pay tax on and you have not yet informed HMRC, make sure you tell them as soon as possible.
This may happen because:
- you didn't know you needed to tell HMRC
- you didn't know how to declare it
- you didn't declare it because you couldn't afford the tax.
If you contact HMRC before they contact you, they may be less punitive in the penalty they give you.
However, if HMRC discovers that you have underpaid tax or unpaid tax, you will receive a hefty fine and maybe face criminal prosecution.
To calculate what you owe to HMRC, you need to work out your net profit for all of your lettings. To do this you should:
- add together all of your rental income from all of your properties
- add together all of your allowable expenses
- take away the expenses from the income
- inform HMRC of exactly how much you owe.
If you perform the requisite calculations and find that you are making a loss, then you should still inform HMRC of your situation.
Your losses can be offset against future profits or against any other profits you might be making in your property portfolio.
If you need to disclose your taxes and take part in the Let Property Campaign you should:
- create a personal tax account with HMRC
- inform HMRC that you want to take part in the Let Property Campaign
- calculate the tax you owe on your rental income
- tell HMRC about all the rental income you have not previously told them about
- make a formal offer of what you will pay them
- pay what you owe
- help HMRC as much as you can with any of their further inquiries.
If you actively take part in the Let Property Campaign and disclose unpaid taxes, HMRC will usually reduce the penalty you receive for having previously undisclosed income.
The level to which your penalty is reduced will depend upon the amount you have helped them with their inquiries and the accuracy of the information you provided.
If you choose not to take part in the Let Property Campaign and do not disclose a rental income source or pay any taxes on it, you will face a significantly higher penalty or even criminal prosecution. The penalties could be up to 100% of the unpaid taxes or up to 200% for taxes owed on offshore income.
Residential property landlords must declare all their rental income and can do so as part of the Let Property Campaign.
Landlords who have income from renting properties must declare everything they earn from these sources to HMRC. Undisclosed income is illegal and as HMRC clamp down harder, the penalties are more severe and the chance of getting caught is far higher.
The Let Property Campaign offers landlords the opportunity to voluntarily pay any outstanding tax on the property income. Landlords who engage with the campaign and are helpful with HMRC's inquiries will receive a substantially reduced penalty fine.