Many people find themselves in the position of owning a second property, often through inheritance or because two people have moved in together and kept their original properties. In addition, more people than ever are buying second properties as part of a longer term plan for capital growth or rental income.
Having already sought the advice of an accountant, most will be aware that they must report any taxable income to HMRC, but there will be a few who don’t necessarily realise they are even making money from a property they’ve rented out or don’t know where to start.
Our advice to anyone in the latter position, is that it’s time to bring your tax affairs up to date now and understand your actual tax position before HMRC catch up with you!
HMRC have run successful campaigns in the past targeted at people who rent out properties but don’t show any rental income on their tax returns. This year they have stepped it up a notch with the launch of their Let Property Campaign, targeting this type of tax evasion. HMRC already holds data on landlords who have received tenants’ housing benefit payments directly, as well as those registered with schemes to protect tenants’ deposits, but will now be gathering data from letting agents, local authorities and elsewhere to track down those who don’t voluntarily come forward.
In our experience, property rental income tends to go undeclared because the properties were not generating profits in the past, maybe due to high interest repayment mortgages and a rental market that wasn’t strong enough to recover all their costs. Now that people find it easier to get better mortgage deals which reduce interest costs as well as increase rent, they suddenly find themselves ‘in profit’. Add to this misunderstandings of what can and can’t be claimed as ‘tax deductible’ on rental income, and this can lead to an under declaration of income.
However, it’s not just about rental income – HMRC are going to be looking at undeclared sales of second properties, on which any profit made will be taxable under Capital Gains Tax. This is often overlooked when people have only ever bought and sold their main residence which has a special relief available to make any profits tax free when you sell.
For more food for though have a look at at our blog ’7 Things To Think About When Owning a Second Property’