Landlord tax is a hugely complicated area, so if you are investing in buy-to-let or renting out any property you own, it’s well worth consulting a specialist property tax adviser. They can help ensure you:
a. Own, let, take income and realise gains from your investment in the most tax-efficient way for your circumstances, and
b. Pay the correct amount of tax to HMRC as and when required.
Failing to declare your income and gains in the right way and therefore not paying enough tax on your profits can lead to fines and criminal prosecution, and it’s just not worth the risk.
In the 2024/25 tax year, compliance crackdowns by HMRC resulted in landlords paying a total of £107 million – that’s an average of over £13,500 each – in tax owed on undisclosed earnings. That was more than double the amount recovered just three years earlier.
Here are five of the most common things landlords fail to understand and do, that are most likely to lead to falling foul of HMRC:
1. Not taking professional advice. Ideally, you should seek advice before investing, to ensure that your buy to let business – no matter how small! – is set up in a tax-efficient way that ensures you meet your legal and tax obligations. You also want to ensure you don’t lose benefits or allowances that could make you worse off.
2. Not understanding that if you have a partner, the division of income must match the share of ownership. Spouses and partners often have the lower earner receive more of the rental income so that their household pays less tax overall. This is perfectly legal, but the income split must be reflected in the property ownership – i.e. if you want one person to receive 70% of the rental income, they must own 70% of the property.
3. Deducting expenses that are not allowed. Expenses is a particularly complex area and it’s very easy to get things wrong. For instance, you can only deduct certain items from income on your self-assessment return (‘revenue expenditure’, e.g. repairs to furnishings), while other items can and should be deducted from capital gains (‘capital expenditure’, e.g. installing an upgraded kitchen). Allowable revenue expenses include those incurred in the day-to-day running of the business, and training that reinforces existing skills - but not the cost of learning a new skill, no matter how helpful to you as a landlord! This is one area where having an accountant who’s experienced in the buy to let field really can pay dividends.
4. Making errors completing self-assessment returns. Some landlords don’t even realise they need to complete a self-assessment return – particularly if they are a PAYE employee in their ‘day job’, they’ve simply inherited a property, or if their rental profits are well below the tax threshold.
For example, now that mortgage interest is no longer a deductible expense, some landlords effectively end up owing tax on rental income they don’t get any benefit from. Understanding all your tax obligations before buying a rental property is essential to making sure it stacks up financially from a net profit perspective.
5. Misreporting capital gains. When a rental property is sold or passed on, tax is usually due on the gain. What some landlords get wrong - usually if they’ve remortgaged over time and released equity - is that the gain is the difference between the original purchase price and the sale price, not the amount of capital they’re left with on completion.
For example, you buy an investment property for £250,000 with an 85% LTV mortgage. After ten years it’s worth £350,000 and you remortgage at 85% LTV, leaving you with £52,500 equity. When it’s worth £400,000, you remortgage again at 85%, then sell it two years later for that same amount. Although there’s only £60,000 equity left, the gain is £150,000 and that’s the amount your CGT will be calculated on.
What to do if you think you might not have paid enough tax
Back in 2013, HMRC launched the Let Property Campaign – an initiative by HMRC that allows landlords to voluntarily disclose any unpaid tax on rental income and minimise or avoid penalties altogether. Since then, there have been more than 100,000 disclosures, which represents just over 4% of total UK landlords.
So, if you think you have undisclosed income, the first thing is to contact HMRC and let them know. You then have 90 days to calculate and pay what you owe. The penalties can range from 0% to 35% of the tax.
If you don’t volunteer this information and HMRC finds out, you are likely to get higher penalties of up to 100% and may face criminal prosecution.
Need help with your tax self-assessment? Get in touch with your local branch to find out how we can help.
