Undeclared rental income: what to do if you receive a worrying letter from HMRC

Since the government launched its Let Property Campaign in 2013 – an initiative which allows landlords to declare unpaid tax in return for a discounted penalty – more than 58,000 disclosures have been made to the authority and approximately £250 million has been recovered in unpaid taxes.

Despite this success, HMRC has been intensifying its efforts to track down landlords with undisclosed income, and many landlords are now facing demands for back payment of taxes and associated interest, as well as facing large fines.

Penalties for undisclosed income can be hefty, ranging from 10% and rising to 100% of the rental income in some cases. Furthermore, landlords who receive letters demanding payment from HMRC will pay substantially more in fines compared to those who declare their income voluntarily. Whether you are a seasoned landlord or new to letting property, it is vital you keep your income and expenditure records up to date and declare any rental income to HMRC in line with its relevant self-assessment deadlines.

There are many reasons why someone might not have declared rental income to HMRC. In some cases, this could be because an individual became an ‘accidental landlord’. An accidental landlord is someone who owns a property, but never intended to let it out. For example, you might have inherited a property that hasn’t been sold or you were forced to let out a home that couldn’t be sold.

How does HMRC know if you have undeclared rental income?

HMRC has numerous ways to find individuals who haven’t declared rental income, and their resources for investigating are extensive. These include gathering information from HM Land Registry and Stamp Duty tax returns, reviewing reports from lettings agents and tenancy deposit scheme providers, carrying out online searches, making door to door enquiries, receiving reports from members of the public and collecting information from other government departments, such as the electoral register. The law allows HMRC to go back up to 20 years and, in some cases, HMRC may carry out a criminal investigation.

What happens if I don’t declare undisclosed rental income?

Regardless of your reasons and no matter how overwhelming it might seem, it is important to remember that not declaring rental income is a criminal offence – the longer you leave it, the bigger the tax bill and penalty you will need to pay. The good news is, there is professional support available to help you navigate the system and get your tax affairs in order.

Can undisclosed rental income affect my chances of getting a mortgage?

Yes. Any mortgage application you make will use your income to calculate how much money you can borrow as well as the interest you will pay. If you have not declared your rental income, then this amount cannot be accounted for as part of the application process as you will be unable to prove you are receiving it. This means you might not be able to borrow the amount you want and you could end up with less favourable terms, such as paying a higher percentage rate. 

More importantly, you might also find that you are unable to refinance your rental property at the end of a fixed term rate. This is because lenders will require copies of your tax returns, which show what rental income has been declared.

What is the best way to declare undisclosed rental income?

Do not wait until you receive a letter of demand from HMRC. Instead, you should speak to a professional, such as a specialist buy-to-let accountant like Perrys, who will be able to guide you through the process, calculate the tax you owe and ensure any mitigating factors are correctly applied.  

What should I do if I receive a letter from HMRC about undisclosed rental income?

If you have already received a letter from HMRC requesting payment for undeclared rental income and you haven’t yet come forward, then it is important you do not ignore it. Instead, you should contact a professional as soon as possible to discuss your options and get assistance with correctly calculating the amount you owe to avoid mounting bills and substantial penalties.

If you have any questions about the information in this article, please feel free to get in touch with your local Perrys branch.