As part of their Let Property Campaign, HMRC have published examples of common tax errors landlords make. Many of these will seem obvious but nevertheless some people are ignorant or become complacent about their tax obligations when owning investment property.
The publications lists ten scenarios, all of which lead to non-compliance but all of which can be reported using HMRC’s Let Property Campaign.
When Beena went to live with her partner, in his flat, several years ago, she decided to rent out her own property. The rental income simply covers the mortgage payments, so as she is not making any profit she does not think it is taxable. This is incorrect as only the interest element of the mortgage is available for tax relief.
Winston inherits a house and rents it out. He uses a letting agent to source tenants and collect rents, and also to organise any property repairs. He has been renting out the house for several years but was unaware that he should be declaring his rental profits to HMRC.
Shafira invests in a property to rent out but wasn’t aware that this might involve paying extra tax.
As well as needing to declare her rental income to HMRC she will also need to consider Capital Gains Tax in the event that she sells the property.
Carl and Suzy jointly own their marital home and are getting divorced. They decide to move into separate smaller properties and rent out their former residence.
They agree to use a letting agent to find a tenant and to collect the rent.
Both Carl and Suzy will have to separately declare their share of rental income to HMRC.
Married couple, Ketan and Priya, relocate to another area because of their work and rent out their marital home but neglect to tell HMRC about their rental profits for the three years they have been letting their property.
Again, each spouse must declare their own share of rental profit via Self Assessment.
Brenda has moved into a residential care home and in order to pay the care home fees she rents out her own house via a letting agency.
All of the rental profit she receives is used to pay her care home fees and she therefore mistakenly doesn’t view her rental profit as taxable income.
Kate and Emma jointly purchase an investment property with the intention of renovating it and letting it out. They both know that their rental profits will have to be reported to HMRC.
As Emma pays Income Tax at a higher rate they decide to include all the allowable expenses on her Self Assessment tax return so as to reduce her tax bill. This, however, is the incorrect approach as profits must be allocated in the ratio that the two women share the income.
Alan and Sue bought a flat for their son to live in while at university, rent free. Their son allows three friends to move in with him but they pay rent to Alan and Sue. The rents exceed the mortgage payments.
The arrangements with the flatmates are informal, so Alan believes there is no tax to pay.
Tom is in the Army and upon being posted to Cyprus, he decides to rent out his UK family home to a friend. However, Tom and his wife overlook the tax implications of letting their house and therefore need to check the rules for non-resident landlords.
Robert and Jane become landlords of a pub and move into the flat above the pub. They decide to rent out their house to their nephew and only charge him the equivalent of their monthly mortgage payment.
The pair don’t consider themselves landlords as they are not making any money from renting out their house. There is no official paperwork in place and they see the arrangement as simply helping out a family member.
Effectively, they are treating the whole mortgage payment as an allowable expenses which is incorrect, as only the interest is tax relievable.
Anyone who can identify with any of the above situations, or for some other reason hasn’t reported their rental profits to HMRC, can do so through the Let Property Campaign.