Blick Rothenberg, a well-known tax consultancy, highlights that landlords who transferred their rental properties into a company during the 2017/18 period are now under scrutiny from HMRC. In its latest initiative, the Revenue aims to ensure accurate reporting of all tax liabilities, according to insights from Heather Powell, a partner and Head of Property and Construction at Blick Rothenberg. Powell notes that landlords who incorporated their property business but failed to report a capital gain on their 2017/18 self-assessment tax return are receiving ‘nudge letters.’ She emphasizes that incorporating a property business is a key aspect of various schemes promoted to landlords significantly affected by the interest restriction when calculating income tax on rents from personally held properties.
According to Blick Rothenberg, the ‘nudge letters’ sent by HMRC prompt taxpayers to verify the accurate calculation of available tax relief. These letters include references to specific HMRC Guidance on technical areas and available reliefs. Taxpayers are granted a 30-day window to respond. Failure to reply may escalate the situation to a tax enquiry, potentially leading to the issuance of a discovery assessment by HMRC.
In such circumstances, landlords who receive a nudge letter are strongly advised to promptly engage with their tax advisors to navigate the complexities and ensure a timely and appropriate response.
He also adds: “I would also recommend that those who have transferred their properties since 2017/18 to a company should take steps to review and ensure that they have correctly reported any capital gain that was realised on the transfer, as I expect that they will be the next recipients of an HMRC nudge letter.”
What have HMRC said?
In an unusual move, HMRC issued a warning in October regarding a hybrid business model, combining a partnership and a company. According to HMRC, the scheme is deemed ineffective, and landlords utilizing it were advised to withdraw and settle their tax affairs. It’s noteworthy that the current ‘nudge letters’ being sent out are not as emphatic in explicitly stating UK taxes are payable. However, they strongly imply that HMRC suspects buy-to-let landlords might be underreporting taxes, indicating that HMRC has a close eye on them.
This suggests a heightened level of scrutiny and underscores the importance for landlords to carefully assess their tax obligations and consider seeking professional advice to address any potential discrepancies.
How do HMRC know about undeclared rental income?
The HMRC employs various avenues to identify rental income, ensuring compliance with tax regulations:
- Stamp Duty Records: HMRC maintains a comprehensive record of all property transactions in the UK through Stamp Duty. This allows them to identify individuals or entities acquiring properties and ascertain if there’s a notable increase in income.
- Land Registry: HMRC collaborates with HM Land Registry, the custodian of property records in England and Wales. This connection enables them to track all property purchases and sales in these regions.
- Estate Agents: Working at the grassroots level, estate agents provide valuable information to HMRC. This partnership allows authorities to uncover unreported rental activities and trace property ownership.
- Security Deposit Transactions: Landlords engaging in shorthold tenancies are required to file deposits under government schemes. HMRC accesses this data, helping them gather information on rental properties and their owners.
- Electoral Register: Utilizing National Insurance numbers submitted to the National Electoral Register, HMRC can link individuals to their properties. This method aids in establishing ownership and identifying any unreported income.
- Informants and Reports: HMRC relies on information from informants, which can include tenants, neighbors, or partners. Reports submitted by these informants contribute to the HMRC’s efforts to uncover unreported rental income.
Given HMRC’s access to income tax and other databases, they can efficiently trace and verify information about individuals or entities, ensuring compliance with tax regulations. Landlords should be aware of these mechanisms and ensure accurate reporting to avoid potential issues.
If you have any questions regarding this article, do not hesitate to email us or call our landline, both of which are noted below.If you’re a first time landlord or a property investor with a large portfolio who is investing in buy to let, we can help. Ashmore Residential are your local property management and letting experts in London . Contact us on 020 8366 9777 or email us at firstname.lastname@example.org for a no obligation chat about our property management services.