The Let Property Campaign is a lifeline for landlords who might not have realised they need to pay tax on rental income from their second property.
A good number of our clients are what’s known in the trade as ‘accidental landlords’. They’re people who’ve acquired a second property because they’ve moved in with a partner, inherited a house on the death of a relative or moved abroad to work for a year or two.
Over the years, we’ve encountered a significant minority who have come to us several years later than they should have and have been renting out a house or flat without completing a self-assessment tax return.
That’s typically because it just hasn’t occurred to them, as they’re used to their tax bill being processed automatically via their employer’s PAYE scheme.
Sometimes it’s because they’ve been a bit naive, renting to a friend on ‘mate’s rates’ and assuming that a bit of extra pocket money doesn’t need to be declared.
It might be that they did expect to pay tax but assumed the letting agent was handling it.
There were also people who were completing a return, but incorrectly, and so underpaying tax. They may have thought they were doing the right thing but had simply got the wrong end of the stick. For example, they might have got the impression they could claim their full mortgage payments on a repayment mortgage as a deduction against rental income. It is in fact only the interest element of the mortgage payments which is allowable.
Whatever the reason, before 2013, the only option they had when it became clear that they’d failed to pay tax, or underpaid, was (a) to hope HMRC never found out and live with both guilt and risk; or (b) admit it to HMRC and hope for the best.
If you were lucky, and HMRC were convinced you were acting in good faith, you’d still get a potentially massive bill for several years’-worth of underpayments and a penalty to boot – sometimes amounting to more than 100% of the total amount owed.
Then along came the Let Property Campaign (LPC).
An amnesty for landlords
Back in around 2011-12, HMRC did some calculations and concluded that it was losing out on around £550 million in tax from something like 1.5m people who weren’t declaring the totality of their rental income.
Uncharacteristically, perhaps, the taxman decided to take some time to understand why some landlords might be failing to pay enough tax. After a period of research and consultation, it concluded that – as we’ve said above – most people were making honest mistakes.
The LPC was launched in 2013 and did a few things really well.
First, it provided case studies so that landlords could recognise their own errors in real-world contexts. Here’s an extract from one of them:
“Beena moved into her partner’s flat several years ago and decided to rent out her own property rather than sell it. Beena didn’t think she was making a profit which needed to be taxed, because the rental income just covered the mortgage payments… When working out her rental profit, Beena needs to be aware that the only allowable expense from her mortgage payment is the interest element.”
Secondly, it took the sting out of admitting your mistake by offering to cancel or reduce penalties, and negotiate manageable terms for catching up on missed payments.
How to benefit from the amnesty
To take part in the LPC and get your property tax affairs in order, you need to:
- notify HMRC of your interest
- within 90 days of notification, disclose all undeclared income, gains, tax and duty
- tell them what you think you owe in total
- pay it as soon as possible.
Or, slightly easier, you can get us to do all that on your behalf.
Assuming they’re convinced you weren’t engaged in a deliberate attempt to conceal your true income, the chances are they’ll accept your payment offer without additional penalties.
HMRC has too much on its plate these days to investigate every single case that comes its way so as long as your offer is reasonable, it’s simply more efficient for them to sign off and move on.
Handily, they may also let you spread your payments if what you owe amounts to a hefty sum and it’s clear that you can’t afford to pay it in one go.
How far back does the LPC go?
If HMRC are convinced that it really was just a misunderstanding or innocent mistake that led to the underpayment, they’ll only expect you to pay a maximum of six-years’-worth of underpayments.
That’s not bad compared to the 20-year limit that kicks in if they think you were deliberately trying to avoid paying tax.
Get on the front foot
It’s always better to admit a mistake yourself rather than to wait for HMRC to find out through its own investigations.
Having said that, it’s also not a good idea to panic. Take some time to get your paperwork together and to talk to us to make sure that you really have underpaid tax.
It’s possible if you were handling your own tax returns that as well as declaring too little income, you also failed to claim allowances and reliefs you were entitled to.
In which case, it might be that even with a disclosure via LPC, you won’t face as big a bill as you might expect.
Talk to us for advice on making an effective disclosure to HMRC.