If you are a landlord and own a rental property, you probably have to pay tax on your rental income. However, a new campaign by HM Revenue and Customs is targeting up to 1.5 million landlords who may have failed to pay or underpaid the tax that they owe.
HMRC estimates that landlords are underpaying by around £500 million each year. So, we look at when you have to pay income tax and what the repercussions are if you don’t pay the tax that you owe.
How to work out if you should pay tax on your rental income
Many landlords earn significant income from rental property, particularly if their homes are in London or the South East. The graph below shows the average rental income in the UK regions and even in the areas that generate the least rental income landlords can expect to earn in excess of £6,000 a year from rental income.
If you earn rental income then the tax you will pay is worked out as follows:
1. Add up all the rental income you receive from your rental property/properties
2. Add up all your allowable tax expenses (as detailed below)
3. Take your allowable expenses from your income
Your allowable tax expenses include mortgage interest payments, lettings agent’s fees, buildings insurance, repairs and maintenance to the property, ground rent and service charges.
If you are an employee on PAYE and your net profit from property is under £2,500, you do not have to complete a self-assessment tax return. Your tax code can be altered to claim the tax you owe. You will have to complete HMRC form P810 every year.
If you are not on PAYE, or it your net profit from property is above £2,500, you will have to complete a self-assessment tax return. If your net profit from property is under £77,000 you can group all the income and expenses as one figure on your tax return.
If your total income from UK property is over £77,000 (20012/13) or more in a tax year you must declare it on the property pages of your Self Assessment tax return and show your expenses separately.
HMRC targeting landlords who haven’t paid the right tax
If you have not paid tax on your rental income then you may be able to take advantage of an 18 month tax amnesty. HMRC have announced that penalties on unpaid tax will be reduced for those landlords that come forward and have warned that anyone who fails to pay tax could face criminal proceedings.
Marian Wilson, head of HMRC Campaigns, said: “All rent from letting out a residential property or holiday home has to be declared for income tax purposes. Telling us is simple and straightforward.
“We appreciate some people will have made honest mistakes, and some may not be fully aware that the rent from a property is taxable, and that is why it always makes sense to talk to us so we can help. It is always cheaper to come forward voluntarily and pay the tax you owe, rather than wait for HMRC to come calling.
“The message for all landlords owing tax is simple – it is better to come to us before we come to you.”