It has been a legal requirement since 2007 in the UK for landlords to register tenants’ deposits with a government-approved scheme.
These deposits typically represent five weeks rent (where annual rents are less than £50,000 or up to six weeks for amounts above this.) HMRC can use this data to estimate the annual rent charged, cross referencing this with the details provided on a tax submission. Where a person registered a deposit but hasn’t submitted a tax return, this will also be highlighted. Where abnormalities are identified, HMRC is likely to contact the individual, requesting further information.
Replying to a HMRC nudge letter
When a letter is received from HMRC, the advice is always to reply to this within the time frame stipulated. Often, when HMRC does not receive a reply, it will open a formal enquiry into an individual’s tax affairs. An enquiry can cover all aspects of an individual’s income. Furthermore, if HMRC believe deliberate avoidance has occurred, it is permitted by law to investigate back 20 years and has the powers to undertake criminal investigations.
In these circumstances, where additional taxes are due, higher penalties are usually charged by HMRC than those available through a disclosure letter. These penalties can be up to 100% of unpaid liabilities, or up to 200% where it is related to offshore income.
Tax advice to deal with HMRC investigations
Where tax has been withheld or underdeclared, the benefit of declaring this to HMRC under this type of disclosure is that any penalties applied will typically be more favourable with cooperation from a landlord.
With several changes and reductions to the tax reliefs available for landlords in recent years, it is not surprising that many landlords submit incorrect self assessment tax returns. Some, including accidental landlords, may not even be fully aware of their tax liabilities and have not declared their rental income.
We recommend all landlords review their gross rents and check the correct amount of tax has been declared. Anyone receiving a letter from HMRC should reply to it within the given time limit and seek professional advice if they are unsure of how to respond.
Ignoring the letter may lead to HMRC opening an official enquiry and, where they believe deliberate tax avoidance has taken place, the penalties can be severe. Voluntarily disclosing the information to HMRC in advance usually means that HMRC will treat you more leniently.
Minimising landlord tax
Given the changes to how landlords are taxed, which is resulting in a greater burden for many, reducing tax is a key issue for landlords. This, coupled with HMRC’s increased focus on landlord tax, means it is important to ensure that all tax submissions are accurate.
With higher interest rates and reduced tax allowances available, it is prudent for landlords to ensure they are holding any assets as efficiently as possible. This includes considering whether a limited company structure is more efficient than holding property personally. Whilst it may have previously been the case that a company structure was not tax efficient, with the above changes many landlords are finding that this now suits them better.
For landlords, there are several additional ownership structures which may provide a more tax efficient way of holding property. These include utilising spousal allowances and their potentially lower tax rates, family investment companies and trust structures. A tax review with a professional advisor would allow landlords to consider all these options.
Summary
The most important thing a landlord should do when receiving a letter from HMRC is to reply to it within the time limit provided. It will always be prudent to take advice from a property tax professional before replying, even if it is just to confirm that there is no tax to pay.
With increased interest rates and diminishing tax reliefs, it would be pragmatic for all landlords to review their tax position and consider if alternative holding structures for their properties are now more tax efficient. Sound professional advice will not only help minimise the risk of a HMRC investigation; it will also help to ensure that a landlord’s tax liability is minimised as much as possible.
* John McCaffery is a Tax Partner at Chartered Accountants and Tax Adviser company Alexander & Co *
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What if they don't take a deposit?
Isn’t it illegal not to take a deposit and register it with one of the government’s recognised deposit guarantee schemes?
it isn't a legal requirement to take a deposit.
It is a legal requirement to register it if you do.
I usually don’t bother taking a deposit. As it’s all for the tenant when tenancy ends. Unless ur beyond doubt to prove things. And even then it still likely to go to tenant. Plus u can only charge 5 weeks.
No, you don’t have to take a deposit at all. I have t sonce 2006 and only use homeowner guarantors.
They also mandate agents provide the data of their clients as another way to find non-payers.
I don’t take deposits…. My tenants are that good and vetted like the NCA 😂….. Anyhow, my tax position in a few years will be a lot simpler….. it will be zero, as I will have sold the lot 🎉🎉
Attack Attack Attack !
Tax burden on landlords is not sustainable. Increased mortgage payments, higher certification costs (EPC, gas, elec), local council licence costs, doubled management costs, EWS costs, higher cost of furniture and appliances........all this plus higher taxes and an overzealous HMRC. No wonder landlords are exiting buy to let in droves....This will reduce the stock, raise rents and then govt will blame lack of investment in BTL:((
Couldn’t agree more Mohammed.
I have never taken a deposit. Good tenants don't need one and bad tenants don't have one.
TheMaluka, a bit like RGI if you can get it you don’t need it.
They’ll give you an umbrella when it’s not raining.
I've exited the business. Too many disincentives, burdensome bureaucratic red tape and taxation. It's about time the socialist Tories reduced the size of government. 50% of the UK GDP is the non-productive state sector but I can't see it changing.
All this voting tory has backfired for you lot now hasnt it haha
And it's even worse for tenants and the younger generation whom wish to purchase a property.
UK PLC is in a pickle and envious eyes pointing in the direction of Landlord's is pointless.
It would be like blaming McDonald's for making profit from selling food.
Joe yes dear you are lovely.
To be honest its doesn’t matter a carrot to me what they do as far as I am concerned Mr Gove can go so boil his stupid head.
Just so sorry for the financial input and taxes I paid, sacrifices made, dedication freely given, sorry for my labour 7 day a week 7 until 7 was usual, then often + to 10.00 o’clock pm to deal with paper work and bull red tape. Incidentally I didn’t vote in the last Election and probably never again will it should be compulsory where everyone votes not just the benefit claimants that has plenty of time and a vested interest.
The self employed and everyone else would have been better off voting labour last time but too late now.
Labour would never have gotten away with what the Tories did and are doing to us and that goes for Tenants as well drive up their rents 30% while telling them it fairer and helping them, for goodness sake, haha.
I no longer take deposits, but do insist on a guarantor. The schemes are quite simply and plainly biased in the tenants favour, the tricky legislation around deposits is full of potentially nasty trip wires, if you need to go to court with your sec 21. Deposits are not worth the endless hazzle.
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