Landlord tax errors

Landlord tax errors are the focus of one of HMRC’s three current campaigns, the “Let Property” campaign, targeting the one million Britons who rent out properties.

The drive of the campaign is to encourage landlords to bring their tax affairs up to date.

The carrot – come forward and we won’t be so hard on you. The stick – it’s the same stick HMRC always uses – fines and penalties.

Earlier this year, HMRC produced a list of the mistakes landlords are most prone to making when letting out property.

In this article, Burton Beavan looks at these errors and how HMRC suggests that you remedy them.

Landlord tax errors – moving in together

Jack and Jill meet and fall in love. They’re both homeowners and Jack and Jill decide to live together at Jill’s place. Jack decides to let out his property to pay the mortgage.

Jack makes the classic mistake of thinking that the entire mortgage payment is offset against the incoming rental when, in fact, it’s only the interest part of the mortgage payment.

The chances are that HMRC will consider that, because the rent payment is the same as the mortgage payment, Jack has undeclared income.

Jack needs to declare his profit to HMRC. If the situation has been going on for a number of years, HMRC suggest they come clean via the “Let Property” campaign website.

Landlord tax errors – inheriting property and letting it out

If you’re in this position, you need to get in touch with HMRC straight away. If you inherited the property a few years ago and have let it out ever since, there is likely to be a fair amount of tax owing and you should get in touch via the “Let Property” campaign website.

If you sold the property and it was not your primary residence, you will need to pay Capital Gains Tax.

Landlord tax errors – divorce

With house prices at a near all-time high, many divorcing couples decide to keep their original marital home renting out smaller properties to live in. They then cover mortgage payments on the marital home by letting it out.

There are two considerations here. First, has the profit been declared? If not, tell HMRC at the “Let Property” campaign website.

Second, HMRC will assume a 50/50 split on the profit from renting unless you tell them otherwise. If you want the share of profits to be allocated differently, you will need to tell the taxman.

Landlord tax errors – care home fees

Many homeowners hang onto their home if they move into a care home. In a lot of cases, the mortgage has been paid off and the rent their tenants pay is used exclusively to service the care home’s fees.

This is taxable income, despite the inherent unfairness of it being classed so in the eyes of many.

You will need to contact HMRC to let them know of the situation and the financial gains you have made at the “Let Property” campaign website.

Landlord tax errors – an investment property which is jointly owned

As we covered under the Divorce sub-headline, where there are two owners, HMRC will automatically assume, unless told otherwise, that the profits from letting are divided equally among the owners.

There are tax advantages to allocating profit differently if one owner earns significantly more than the other. For HMRC’s guidance on how to split rental income, click here.

Landlord tax errors – if you buy a home for a son or daughter at university

In this situation, your child will often live rent-free in the property with the mortgage being covered by the rental payments of his or her flatmates. If the rent received is greater than the interest on the mortgage payment, tax will be due.

If you and/or your spouse or civil partner are paid in PAYE, you need to tell HMRC about it after claiming back your allowable expenses. For families in this situation, HMRC have published this guidance.

Landlord tax errors – members of the Armed Forces

Often, members of our Armed Forces will rent out their property when they are stationed overseas. If this is the case, you will need to declare your profit on a Self Assessment form and make sure you are following the guidelines for non-resident landlords.

Landlord tax errors – tied accommodation

HMRC offer guidance on their website about a pub landlord who lives in the flat above the pub but rents out their homes to their nephew, charging him the equivalent of the entire monthly mortgage payment as rent.

As we mentioned earlier, even though there is no cash profit in the deal for the pub landlord, it’s only the interest in the mortgage payment which can be claimed back. In tax terms, they will be making a profit that will need to be declared (unless allowable expenses cancel out that profit).

HMRC advice that this guidance is followed.