As a property investor, you need to understand how tax applies to your rental income. Usually, you must complete a self-assessment tax return yearly. It is important to declare your rental income to HMRC. Otherwise, you will face consequences such as penalties. Before you submit your tax return, you must make sure that it includes all your rental income. Now, the question arises: how does the taxman find out about rental income?
There are various methods through which HMRC can find out if you have any undisclosed rental income. They will investigate you and that will lead to you owing a lot more than you would otherwise. Therefore, it is best to declare it yourself.
What Qualifies as Rental Income for Property Owners?
Primarily, your rental income is the rent you receive from tenants. However, it also includes other payments tenants make for your services as the property owner. These include the following:
- Utility bills such as heating, broadband, water, including hot water.
- Repairs to the property.
- Cleanup of communal areas.
Any non-refundable deposits you charge for your property are also part of your rental income. Also, if you keep any money as a returnable deposit. You will return this once the tenancy ends.
You can deduct expenses you bear from renting your property. Additionally, you can claim a tax credit. The basis for which is 20% of your mortgage interest payments.
When Do You Need to Pay Tax on Rental Income?
When you make profits in a tax year, you need to pay tax on it. The tax year starts on 6 April and ends on 5 April the next year. It is necessary to declare your rental income for the tax year in which it is due. Regardless of whether you pay before the tax year ends.
Furthermore, you can deduct any allowable expenses that relate to work done for a specific tax year. In this case, it is not relevant whether you pay the tax before or after the tax year is over. So, how does the taxman find out about rental income?
How to Complete a Tax Return for Rental Income
You need to inform HMRC regarding any rental income by 5 October after the end of the tax year. 5 April is the end of the tax year. Usually, you must complete a self-assessment tax return if you earn an income from rental property. In case of a paper tax return, the deadline is 31 October. Whereas for an online tax return it is 31 January the next year.
Main Tax Return
You must complete the main tax return if your total income is £10,000 or more from UK property. This is before you take away expenses. Also, if, after deducting rental expenses, your rental income is more than £2,500, then you need to fill in the main tax return. However, if it is less than £2,500, HMRC has other ways to collect the tax. They can do so through the PAYE system. That is, if you already pay tax through this method. You can contact HMRC for more information on how to complete your main tax return.
You must complete the UK property pages if your income is from UK property, this includes UK holiday lets. In case you own property abroad, you need to fill in the foreign pages.
Under the circumstance that you are running a trade, you must complete the self-employment pages. Self-employment includes running a guesthouse, hotel, or a B&B. Also, this is applicable if you are earning a trading income. Yet, how does the taxman find out about rental income?
How to Declare Losses on Your Rental Income
You can carry forward losses from UK rental properties against future profits you generate from your UK properties.
Suppose in the tax year 2022-23, your rental income was £7,000. However, you claimed expenses are worth £10,000. Then, you should record a loss worth £3,000 for that year.
Please note that you cannot offset this loss against your other sources of income. For example, pension income or dividends. There is an alternative route. Suppose that in the 2023-24 tax year, you make £6,000 profit from your rental property. Thus, you can deduct your previous loss, which was £3,000. As a result, you owe tax on rental profits of £3,000 only.
Do You Need to Pay Tax When You Sell Your Property?
When you sell your rental property, you need to pay Capital Gains Tax (CGT) in most cases. There are special rules in case the property was or is your home. Or else,
You’ll usually have to pay Capital Gains Tax (CGT) when you sell the property you have been letting. Special rules apply if the property is or has been your home. Or else, the sale of your property is the same as the sale of any other asset. This means you must pay 18% if you are a basic-rate taxpayer. While a higher or additional-rate taxpayer must pay 28%.
Between 6 April 2020 and 26 October 2021, the window to pay CGT bill for property sales was thirty days. The deadline to pay the CGT bill is now sixty days. Still, how does the taxman find out about rental income?
Is It Probable that HMRC Will Find Out About Your Undeclared Rental Income?
When you run a property business or rent out a property as an individual, you must declare your rental income. If you do not disclose all your rental income, what is the possibility of HMRC finding out? It is very likely that HMRC will find out, and that means consequences for you. They will take strict actions to collect the tax you owe. Also, they can impose fines and penalties on you.
Most property owners follow the rules and regulations regarding declaring their renal income. However, there are some property owners who may make mistakes or not remember to declare all their rental income.
What If You Make a Mistake When Declaring Rental Income?
Property owners may sometimes fail to meet their tax obligations. This is because of the stress of other aspects in managing a property portfolio. For example, undertaking renovations or repairs, arranging insurance, searching for new tenants, negotiating agent fees, or new property purchases. Nevertheless, you cannot use all this as an excuse to not the entirety of your property income. HMRC will evaluate your case separately. If they suspect that a property owner is intentionally avoiding tax, then they can reclaim tax payments for 20 years. Furthermore, they will impose penalties and fines the value of any unpaid tax along with underpaid tax. So, how does the taxman find out about rental income?
What are Your Obligations When You Rent Out Your Property?
There are different thresholds for tax for individuals and sole trader property owners on their rental property income. You will find the tax thresholds for tax year 2023/24 below. Please note there are other sources of income on top of your rental income that count as taxable income. For example, from self-employed profits, interest made on investments and savings, pensions, wages, and reimbursed expenses. Property owners have the option to invest in property through partnerships, companies, and other corporate entities.
Suppose you decide to invest in a company. Then corporation tax applies to the profit you make. Currently, it is at 19% – 25%. This depends on the level of profits you are making in your company.
If you rent out a room in your principal residence, then your threshold for tax-free income is up to £7,500 per year. The Rent a Room Scheme allows you this threshold if you let out furnished accommodation in your primary home. It is always best to seek profession advice from a property accountant or a specialist property owner.
Personal Tax Rates for Income Received from Rental Properties
There exists a standard Personal Allowance of £12,570 for every person. You do not need to pay tax on this amount of income. If you claim Blind Person’s Allowance or Marriage Allowance, then your Personal Allowance can grow. However, if your income is more than £100,000, then it is smaller. The question remains: how does the taxman find out about rental income?
Here are the tax rates you must pay beyond your personal allowance:
|Personal Allowance||£0 – £12,570||0%|
|Basic Rate||£12,571 – £50,270||20%|
|Higher Rate||£50,271 – £125,000||40%|
|Additional Rate||£125,001 and above||45%|
Do You Need to File a Tax Return to HMRC?
If the following applies to you in the last tax year, from 6 April to 5 April, then you must file a tax return:
- If you, as a self-employed sole trader, earned more than £1,000. This includes anything you have the right to claim tax relief on.
- You had an earning of £100,000 or more.
- In a business partnership, you were a partner.
Furthermore, you may also need to file a tax return in case of any untaxed income. For example:
- Commission and tips.
- Income from other sources, such as investments, savings, and dividends.
- Money you received from renting out property.
- Foreign income.
So, how does the taxman find out about rental income?
When is the Self-Assessment Tax Return Due?
The previous tax year began on 6 April 2022 and on 5 April 2023, it ended.
If you are filling your tax return online, then you need to submit it by midnight 31 January 2024. This is the due date for the tax year 2022-2023.
On the other hand, the due date for submission through paper return is 31 October 2023. This is for the tax year 2022-2023.
How Does the Taxman Find Out About Rental Income in the UK?
HMRC uses various methods to uncover the undisclosed rental income as follows:
Stamp duty land tax records
Stamp Duty Land Tax (SDLT) applies when a person purchases property in England or Northern Ireland. In Wales and Scotland, there are equivalents of SDLT. Thus, HMRC has all the records of the properties people purchase. From this, they can figure out if they are rental properties. As that is likely the case when a person buys multiple properties.
HM land registry
The HM Land Registry has all the records on properties and land sold in both England and Wales. HMRC has communications with them and can learn about undeclared rental income from them.
Estate agents are in an ideal position to identify suspicious property rental activity according to HMRC. They can use them to find your undisclosed rental income.
Property owners need to place the deposit into a tenancy scheme that is government approved. They must do so if the contract is that of an assured short hold tenancy. HMRC can access these schemes and the information they contain.
You register for electoral register through your National Insurance number. This gives HMRC an easy way to link people to property.
When people report property owners to HMRC, they take it seriously. For example, tenants, neighbours, or ex-spouses may report someone. Now, you know the answer to the question: how does the taxman find out about rental income?
How to Declare Unpaid Tax
You can inform HMRC about your rental income from previous years to declare any unpaid tax. This way, if you end up paying a penalty, it is a less amount than if HMRC finds out about it themselves. You will receive a disclosure reference. After which you have three months to calculate how much you and pay the amount. For any tax years before 2017-2018, you do not need to include the £1,000 tax-free property allowance.
What is the Let Property Campaign?
If you fail to declare rental income to HMRC, then you can deal with it through the Let Property Campaign. It leads to better terms when it comes to settling your bill as compared to when HMRC investigates you.
You can get the best possible terms if you come forward. Then, you will have 90 days to calculate what you owe and pay the amount. Thus, HMRC can retrieve tax from anyone who did not disclose their rental income over a certain period. However, this is applicable to property owners only. Trusts, companies, or people who let out a shop, lock up or garage are not part of this campaign. You should know the answer to the question: how does the taxman find out about rental income?
Do You Need to Pay Class 2 National Insurance?
If you run a property business as a property owner, then you must pay Class 2 NIC. You need to consider this further if you meet the following criteria:
- Property investment is your main occupation.
- You put up more than one property for rent.
- You buy new properties and grow your portfolio continuously.
Suppose you are running a property business through which you earn more than £6,725 a year. Then you must pay Class 2 National Insurance. Furthermore, you can qualify for the full state pension if you make voluntary Class 2 National Insurance payments. This applies if your profit is less than £6,725 annually.
In case you only own a few Buy-to-Lets and do not change them yearly, then you are not running a property business. Therefore, you do not need to pay Class 2 NIC.
Moreover, if your total income from property is not over £1000, then you can claim a property allowance of £1,000. This is free of tax. However, it is unlikely to happen as your earnings usually exceed this amount.
Under the circumstance that you own both UK and foreign property, the rental income for each goes through separate calculations. If there are any doubts, you can reach out to your accountant. Or you can simply visit GOV. UK.
To conclude, as a property owner, you must declare your rental income to the HMRC. There are consequences for not doing so. You may end up paying hefty penalties. If there is any undeclared rental income, the HMRC can find out about it. They have various methods through which they can uncover your undeclared rental income. Therefore, it is best to come forward regarding any undisclosed information before HMRC investigates you.