By Chrissy Leach, associate accountant at Irwin Mitchell
HMRC has been using its Connect computer system for several years now to receive and analyse data from a number of sources. In terms of property income, this includes Land Registry information, which has proved a rich fishing ground for HMRC for some time, and Airbnb lettings. We understand that Airbnb is sharing data with HMRC for tax years 2017/18 and 2018/19.
This data allows HMRC to launch targeted enquiries into individuals who haven't declared their lettings income and paid the relevant tax. It's likely to begin with a letter from HMRC asking the individual if there is anything they need to declare.
If the individual has let out part of their main home, the rent-a-room relief may be available which allows you to receive income of £7,500 per year tax free. For other rental income, there is a property allowance that gives £1,000 of income per year tax free. Income in excess of the rent-a-room relief or property allowance must be declared to HMRC and any tax paid.
Where income hasn't been declared, under the discovery rules HMRC can go back up to 20 years to recover the unpaid tax, plus penalties and interest.
Where tax returns have been submitted with rental income omitted, individuals can amend their 2018/19 tax return until 31 January 2021. For earlier years, a disclosure will need to be filed under the let property campaign where an offer is made to HMRC to settle the additional tax, plus penalties and interest. If this disclosure is made before a letter is received from HMRC, the penalties can be reduced as it is unprompted.
HMRC may receive details of overseas rental income paid to UK residents under the Common Reporting Standard where over 100 countries now exchange financial data with the UK. If the property is located overseas, the let property campaign isn't available and instead the worldwide disclosure facility should be used. The penalties in this case are a minimum of 100% of the unpaid tax for the years up to 2015/16.
It's also worth noting that landlords with property income above £10,000 will need to comply with Making Tax Digital for Income Tax from 6 April 2023. This involves keeping records electronically and sending quarterly updates to HMRC instead of filing an annual self assessment tax return.