Lately we have seen an increase in HMRC asking people if they have received rental income. This comes in the form of a ‘love letter’ from HMRC and results in more and more people having to declare their rental income.
The reason for receiving this ‘love letter’ is HMRC’s computer system “connect”. Connect draws data from all departments and connects you to every government system. It also looks at our digital footprint, snooping on our social medias, Ebay accounts and even Airbnb bookings. Using Artificial Intelligence (AI) the computer will asses our profiles and see if we could afford rental properties by cross referencing with your declared income on your HMRC tax account.
The ‘love letters’ we refer to are a direct result of HMRC’s Connect talking to its mates at the Land Registry. From this data they form a list of people that have sold property. If it is not listed as your main residence HMRC will put two and two together and ask if you have sold a second home and/or rental property. This will then be subject to capital gains tax and more!
Have you declared?
If the sold property was used as a rental property, HMRC will then look to see if you have declared the rental income. In a lot of cases this has not been done and can go back many years. In a recent case of ours, we had to declare 10 years of rental income for a Husband and Wife.
‘My Mate Down The Pub’
Getting tax advice down the pub is not always a good idea. In a few cases, taxpayers have been under the impression that because the mortgage payments covered the rental income they didn’t have to declare the rental income. In reality only the interest is deductible. For higher earners being able to offset the basic rate relief is being phased out, turning rental income into profit and therefore tax payable.
Beeng moved into her partner’s flat several years ago, and decided to rent out her own property rather than sell it. Being didn’t think she was making a profit which needed to be taxed, because the rental income just covered the mortgage payments.
When working out her rental profit. Being needs to be aware that the only allowable expense for her mortgage is the interest amount of her mortgage repayment.
The interest amount of mortgage payments is restricted to the basic rate of income tax, irrespective of which income tax rate Being normally pays for other income she may have
If you have a rental property and need a ‘health check’ we would be happy to discuss and give you the options to declare the income and profit that you have been missing off of your tax returns. Declaring the error before the ‘love letter’ arrives will help your negotiations with HMRC and reduce any high penalties.
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