Property Income Central Housing Group

Investors Underdeclaring Property Income

Thousands more landlords are being pursued by the taxman as part of a drive to catch out those investors underdeclaring property income, figures obtained by Telegraph Money have revealed.

The number of landlords found to have underpaid or underdeclared tax on property income rose by 51pc during 2018 to 8,704, according to a Freedom of Information request submitted by this newspaper.

The steep rise has sparked concern among groups representing property investors, who fear that landlords who make honest mistakes are being punished alongside deliberate tax evaders.

Data from HM Revenue & Customs (HMRC) also show the amount of income tax clawed back from landlords rose 67pc in 2018, to £32.8m, while the value of fines more than doubled to £5.6m.

The crackdown is part of HMRC’s “Let Property” campaign. Launched in September 2013, it targets landlords underpaying tax on property income.

At the time, HMRC said the campaign would run for at least 18 months but it has been extended indefinitely.

HMRC estimated up to 1.5 million landlords were underpaying tax worth as much as £500m a year.

Telegraph Money understands that last year’s surge came because HMRC identified more landlords it suspected of not paying enough tax and sent them letters asking for payment or an explanation.

Since the beginning of 2017, HMRC has been able to rely on a new weapon to identify people underpaying tax – powerful software called Connect.

Connect’s job is to spot likely examples of underpaid tax.

It does this by analysing data from government databases and other sources. The software cost £80m to develop.

If HMRC catches landlords who have not paid the right amount, it can reclaim up to 20 years’ worth of these property income payments. It can also fine the landlord up to 100pc of the value of the unpaid tax and bring criminal charges.

If a landlord has made an honest mistake with underpaying tax and they admit it, the tax office will only reclaim tax going back six years and will charge smaller fines, if at all.

Once you tell HMRC about undisclosed income you have 90 days to pay the correct amount due, as well as any interest and penalties.

An HMRC spokesman said: “We believe our customers want to pay the right amount of tax and want to help those not paying the correct amount to put that right.

“The Let Property Campaign is an opportunity for landlords who owe tax through letting out residential property to get up to date with their tax affairs in a simple, straightforward way and take advantage of the best possible terms.”

But landlord groups say the HMRC campaign risks penalising landlords who unwittingly underdeclare their letting income.

Chris Norris, of the National Landlords Association, a trade body, said: “Tax can be a complicated and confusing process for landlords who are trying to cut costs by doing their returns themselves, rather than seeking specialist advice.

“It is possible some landlords have unwittingly disclosed less tax on letting income than they should have.”

It has also been harder for landlords to work out their taxable income due to two recent Government changes.

First, until April 2016 landlords could deduct 10pc of net rent from their profits every year to cover repair costs for their properties, known as the “wear and tear allowance”.

Landlords could claim the tax break even if no repairs were made.

Now they can only claim relief on costs they actually incur when replacing items in a let property. Many landlords are unaware of the shift.

Mr Norris said: “Changes to allowable expenses and deductions have been poorly communicated and are not necessarily understood.”

Second, landlords with a buy-to-let mortgage have an extra hurdle to calculating their taxable income.

efore April 2017, landlords were allowed to deduct 100pc of their mortgage interest payments from their taxable income.

Since then the amount of mortgage interest that can be deducted by higher-rate taxpayers has fallen to 75pc and will fall an additional 25 percentage points every year until 2020, when it reaches zero and is replaced by a 20pc tax credit.

John Stewart, of the Residential Landlords Association, a trade body, said: “The tax system is becoming ever more complex in the private rented sector, and communication from HMRC on changes to mortgage interest relief has not been sufficient.”

Mark Alexander, of Property118.com, a landlord forum, said small landlords were particularly affected.

He said: “Not only is the additional tax hitting them, but so is the cost of getting an accountant to check what they’ve done is right.”

Landlords who need help with working out their declarable income can consult documents on the HMRC website, speak to an accountant or consult a trade body.

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