16,000 landlords admit to underpaying tax as HMRC cracks down on buy-to-let

Thousands of landlords have admitted to underpaying tax on their rental income, an increase of 145% compared with the previous year.

In 2018-19, more than 16,000 landlords voluntarily told HM Revenue & Customs (HMRC) they had underpaid tax, after receiving a letter encouraging them to come clean.

Here, we explain how the tax office is cracking down on buy-to-let income tax, and how you can ensure you're paying the right amount.

HMRC recovers £42m in buy-to-let taxes

In 2018-19, 16,110 landlords admitted to not paying enough income tax, a huge increase on the 6,600 recorded the previous year.

The jump came after HMRC sent letters to investors it suspected of avoiding or underpaying tax, as part of its Let Property Campaign.

The campaign, which was originally launched in 2013, encourages landlords to disclose their underpaid or unpaid tax voluntarily, rather than waiting for HMRC to investigate.

In return, HMRC will generally offer more favourable terms. Landlords who voluntarily disclose unpaid tax will face penalties of up to 20% (plus tax or interest) - significantly lower than the 200% maximum fine that can be imposed after a HMRC investigation.

In total, HMRC recouped £42m from the scheme in 2018-19, double the £21m recorded in 2017-18.

What to do if you've underpaid income tax

If you think you may have inadvertently underpaid income tax, or failed to report some income, it's important to not bury your head in the sand.

Should HMRC discover the shortfall through its own investigations, you'll face a much higher fine than if you admit to the mistake beforehand.

To avoid heavy fines, you should work out your underpayment and make a voluntary disclosure to HMRC. Once you've made this disclosure, you'll have 90 days to pay what you owe.

If you receive a Let Property letter out of the blue, try not to panic. HMRC will give you 30 days to respond and admit you need to make a disclosure.

If you disagree that you owe HMRC money, it will then begin its own investigation. Be warned, however, that you'll be subject to the full range of penalties if you're found to have underpaid.

Let Property is open to individual landlords, people renting spare rooms for more than the Rent-a-Room threshold, and those letting out holiday homes abroad. It's not open to landlords who own properties through limited companies.

• Find out more:read the government's full guide to how the Let Property Campaign works.

Paying income tax as a landlord

It's important to get to grips with how tax on rental income actually works, whether you're renting out a room in your house or own a portfolio of homes.

Rental income is taxed the same way as employment income, so you'll pay the standard rates of 0%, 20%, 40% or 45%, depending on how much profit you make.

Aside from the rent tenants pay, you'll also need to declare any fees or charges receive money for - cleaning communal areas, for example.

This income will be added to your salary, savings interest, dividend or other earnings, to determine the rate at which you're taxed, which means you might find yourself in a higher tax band.

As an individual landlord, you'll usually need to file a tax return for the previous tax year by the end of January if you file online. So, for example, the deadline for filing your 2018-19 tax return will be 31 January 2020. You'll also be expected to pay any outstanding tax on this date.

Allowable expenses for landlords

There are some expenses you're allowed to offset when calculating your tax bill. These commonly include the following:

• Utility costs such as water rates, electricity, gas, and council tax.
• Fees for letting or managing agents, and for your accountant to prepare your tax return.
• The cost of services such as cleaning and gardening (if included in the rental agreement).
• Costs incurred when advertising the home to new tenants.
• Costs for replacing items in furnished properties. You can only offset the actual cost of buying new items, as the 10% 'wear and tear' allowance no longer exists.
• Landlord insurance

It's also possible to offset some of the interest charged on your buy-to-let mortgage, though this is currently being phased out, and replaced with a 20% tax credit mortgage interest. You can find out more in our guide on buy-to-let mortgage tax relief.

• Find out more:get the lowdown on deductibles with our full guide on allowable expenses for landlords.