Within the last few weeks we’ve had a few clients contact us for advice about letters a relative or friend has received from HMRC. The title of the letter is “Income from letting property”. It goes on to say “We believe you own property that you may receive or have previously received income from letting. Our records do not show that you have told us about this income”.

It seems HMRC are identifying people who own more than one property and are going after them for tax on undeclared rental profits!

In this blog we’ll explain what to do if you receive one of these letters and how to act now if you’ve got a property that you’ve not told HMRC about.

What do I do if I receive a letter from HMRC?
Firstly, don’t panic! If you do have more than one property, it may be that you’ve never rented it out, a member of your family is living in it rent free, or it could be somewhere in the countryside that you go for a break away. And in a lot of cases even if you have been receiving rents from a tenant you could be running at a loss and no extra tax will be due.

If you’ve not had any rental income, then all you have to do is contact HMRC in writing and let them know what your circumstances are and they’ll remove you from their system and close down the case.

What do I do if I have undeclared rents?
If you’ve been receiving rents, you’re firstly going to have to work out what profit you’ve been making, so that HMRC can calculate whether there’s any tax due.

How to work out rental profits
Rental profit is basically total rents received, less the expenses you’ve had relating to the property. You’ll have to work out a separate amount of profit for each tax year you’ve been receiving rents for. You’ll be able to get details of rental income and expenses from your bank statements, any receipts you’ve kept, mortgage statements and tenancy agreements.

Here’s a list of expenses you can claim:

  • Mortgage interest (only the interest element of your mortgage is allowable, then a percentage disallowed which results in extra tax if you’re a 40% taxpayer)
  • Landlord insurance
  • Letting agency fees
  • Repairs on the property (only maintenance costs are allowable and not if the repair has improved the property. Examples of improvement include loft conversion, new interior walls, replacing laminate worktops for granite)
  • Gardening and window cleaning
  • Rates and utilities bills
  • Ground rents and services charges
  • Phone usage for calls with tenants
  • Stationery and advertising used to get new tenants
  • Vehicle costs for proportion used for rental business

You can’t claim for the cost of buying the property! These costs are used to calculate your capital gains tax when you sell the property.

How much tax will I have to pay?
Each tax year you get a tax-free allowance. For 18/19 you can earn up to £11,850 without paying any tax, so if the only income you have is from your properties and rental profits are below £11,850, then no tax is due.

If you have other income above the tax-free allowance and your total income is below £46,350, then tax will be payable at 20%. If you earn above £46,350, then tax will be payable at 40%.

These allowances and tax bands are based on the 18/19 tax year and differ slightly for other years.

If you’re making a loss, then no tax will be payable and the losses can be carried forward to offset against future rental profits.

The next step is to reply to the letter and wait to see what they come back with.

As this is a new initiative from HMRC we aren’t sure if any penalties will be imposed on any tax due.

What if I have undeclared rental income, but haven’t had a letter off HMRC?
The best thing to do is to register with HMRC as soon as possible and at a minimum start declaring your rents going forward. For full peace of mind, you should do tax returns for the years going back since you started receiving rents.

As always if you need any help you know where we are!

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