Landlords who rent out their properties earn rental income. When you file your self-assessment tax return at the end of the year, you need to declare this rental income so that it can be taxed accordingly.

If the property is rented through a limited company, you’ll need to include the income in your company accounts. In this case, you’ll be liable to pay Corporation Tax on the rental income.

If you are running a property business, any rental income from residential or commercial properties will be subject to tax. If you’re a sole trader or an individual with rental properties, you must declare your rental income to HMRC every year. Your tax liability will be calculated by HMRC and paid as Income Tax.

HMRC learns about your rental income through your self-assessment tax return or company account filings. However, these are not the only sources of information. As a landlord, if you fail to disclose your rental income to HMRC, you may be surprised to learn that there are several other ways HMRC can detect and trace undeclared income.

Here’s a breakdown of how HMRC uncovers undisclosed rental income, as well as your tax obligations as a landlord and the proper way to disclose your earnings.

Can HMRC find out about undisclosed rental income?

Yes, HMRC will almost certainly discover if you have rented out a property and are earning rental income from it. Whether you are an individual or a business, undeclared rental income cannot be hidden from HMRC, and if they uncover it, penalties may follow.

Fortunately, most property owners understand their legal obligations and comply accordingly. In many cases, failure to declare rental income is an honest mistake. New landlords might forget to report their rental income, or landlords with large portfolios may unintentionally omit some rental earnings.

In case of a mistake, what happens?

Landlords can sometimes miss tax and return deadlines due to other responsibilities, such as purchasing new properties, repairing and renovating existing ones, finding tenants, ensuring health and safety compliance, arranging insurance, and more.

However, being busy is not a valid excuse for failing to meet your tax obligations. Each case where landlords fail to disclose rental income is considered individually by HMRC. If HMRC believes the non-disclosure was deliberate to avoid tax, the penalty can be as severe as 20 years’ worth of tax on the property. Additionally, there may be further fines and penalties based on the total amount of unpaid or underpaid tax.

How is rental income taxed?

You need to declare the following to HMRC:

• Rental income
  
• Non-refundable deposits
  
• Money received from tenants for repairs, and similar payments
  

HMRC calculates the tax owed on your rental income based on your personal tax band.

If you have income from other sources in addition to your rental earnings, you must declare all of these together. Your overall tax liability will then be calculated on the total income from all sources, including rent.

National Insurance contributions

If you run a rental business as a landlord, you may be required to pay Class 2 & Class 4 National Insurance contributions in addition to income tax. You will need to pay National Insurance contributions if your rental income is £6,515 or more per year.

The government will consider you a landlord running a business if the following apply:

• Your main profession is being a landlord
  
• You have rented out more than one property.
  
• You are investing in new properties to rent.
  

If you need to declare unpaid taxes, simply inform HMRC. You will need to disclose any rental income earned in previous years. Any penalty you may have to pay will likely be less than the amount due if HMRC investigates and uncovers the undisclosed income.

What are the ways HMRC can find out about your undisclosed rental income?

HMRC has several ways to discover rental income that has not been disclosed. These include:

• Stamp Duty Land Tax Records
  Every property bought in the UK or Northern Ireland is subject to Stamp Duty Land Tax (SDLT). This gives HMRC direct access to all records of property purchases. Generally, if several properties are purchased by a single individual or entity, HMRC assumes these are rental properties.
  
• Land Registry Records
  HM Land Registry directly informs HMRC about properties bought and sold in England and Wales.
  
• Estate Agents
  Estate agents often notify HMRC if they suspect undeclared rental activity. This helps HMRC identify whether individuals or businesses owning these properties have properly declared their rental income.
  
• Shorthold Tenancy Security Deposit
  For assured shorthold tenancies, landlords must place tenants’ deposits in government-approved tenancy deposit schemes. HMRC can access these scheme records to verify whether the rental income has been declared.
  
• Electoral Register
  The National Insurance Number is used when registering on the electoral register. This is a reliable method for HMRC to determine how many properties you own and whether you receive rental income from them.
  

Informants
Tenants, neighbours, or spouses may report landlords to HMRC if rental income is believed to be undisclosed.

About the Let Property Campaign

The HMRC-run Let Property Campaign offers landlords an opportunity to disclose their rental income, whether from properties in the UK or abroad. This campaign helps landlords update their tax affairs and benefit from favourable terms.

All landlords who have not yet declared their rental income should notify HMRC as soon as possible. Once you come forward, you will have 90 days to pay any outstanding tax.

Those eligible to use the Let Property Campaign include:

• All landlords of residential properties who have not declared rental income, whether they have multiple properties or a single rental property.
  
• Landlords renting to workers, students, or holidaymakers.
  
• Even if you rent out a room in your main residence and your income exceeds the Rent a Room Scheme threshold, you can still use the Let Property Campaign.
  

Remember, if you plan to move abroad or live overseas for more than six months and rent out a property in the UK, you will be liable to pay rental tax.

Please note that landlords of commercial properties such as lock-ups, shops, or garages are not eligible for the Let Property Campaign. Additionally, if you are disclosing income on behalf of a trust or company, this campaign does not apply.

To Conclude

According to HMRC, a significant number of landlords in the UK have yet to declare their full rental income. In response, HMRC launched the Let Property Campaign to give landlords of residential properties the opportunity to disclose any undisclosed rental income.

When the Let Property Scheme was introduced, HMRC estimated that around 1.5 million landlords had either not declared or had under-declared their rental income. This shortfall is believed to cost the UK nearly £500 million each year.

HMRC has the tools and resources to obtain accurate information about landlords’ rental earnings. While HMRC will continue to invest time and resources investigating landlords who may not be declaring rental income, it is in your best interest to declare all your rental earnings fully to avoid penalties.

For expert guidance on disclosing rental income, consider working with a specialist landlord accountant such as Cangaf Ltd. As your accountant, we ensure that whether you live in the UK or abroad, you remain fully compliant with the country’s tax laws.