Landlords who have failed to declare their rental earnings to HMRC are being warned to pay up or face higher penalties.
The Revenue is targeting widespread tax evasion on property lettings, and estimates that one million buy-to-let and other private landlords are not declaring their rental income, cheating the public coffers of at least £550m a year. Many are understood to be using inflated claims for letting expenses to pay less tax than they should. "A lot of people are knowingly not declaring," said an HMRC spokesman. "We want to hammer down that £550m – it's significant money."
HMRC is running a Let Property Campaign to encourage landlords to come clean, or risk higher penalties. As well as those with undeclared rental earnings from previous years, the campaign is aimed at landlords who have filed inaccurate tax returns.
Landlords who come forward voluntarily will still have to pay a penalty of up to 20% – plus the tax and interest – but this compares with penalties of up to 100%, and even the possibility of prosecution.
HMRC has been ramping up its scrutiny of landlords over the past two years. Last year Hertfordshire landlord Kevin Power, 61, who rented out and sold property evading £84,000 in tax was given a suspended one-year prison sentence.
The campaign comes as many landlords have been enjoying record rents in a booming lettings market. HMRC warns that landlords with unpaid tax who ignore the campaign's "disclosure opportunity" are "playing a high risk game". Officials are obtaining data from letting agents, local authorities and elsewhere to track down those who don't come forward.
HMRC already holds data on landlords who have received tenants' housing benefit payments directly, as well as those registered with schemes for protecting tenants' deposits.
HMRC has run similar amnesties to tackle offshore account-holders, plumbers and others. Landlords who sold a rental property but did not declare the profit for capital gains tax were the subject of its Property Sales campaign last year.
Accountants said such initiatives have been a cost-effective way for HMRC to recover tax in a range of sectors, with voluntary disclosures in past campaigns yielding more than £500m since 2007.
"It's money in for least effort," said Mike Warburton, director at accountants Grant Thornton. He added that while there would "always be scope for evasion" on property lettings because rents were not taxed at source, the individual amounts owed by many landlords were "not likely to be large" because of the tax-deductible expenses they can claim.
HMRC believes that most of those failing to declare rental earnings owe only a few hundreds of pounds of tax a year. Many are thought to be small-scale, amateur landlords renting out a property as a retirement nest egg, or "accidental" landlords letting out a former home they have been unwilling or unable to sell.
HMRC accepts that "not every landlord who owes tax is deliberately trying to cheat the system", and points out that in some cases those making a disclosure would not be charged a penalty. The campaign is "not about penalising genuine mistakes", said a spokesman.
An example, he said, might be a landlord who misinterpreted the rules on tax-deductible expenses by incorrectly claiming for the capital repayments as well as the interest on the buy-to-let mortgage. However, he added: "Most people letting out a property will know that rent is taxable."
Rental Income Tax Advisors (Rita4Rent.co.uk, a specialist in landlord taxation, said it expected most of those making a disclosure under the campaign to pay a penalty of 10%.
Janice Parker, manager at Rita4Rent, warned that while HMRC was likely to prioritise letting agents' records to pinpoint the landlords who are not paying up, those not using agents might still be identified if, say, they had advertised a rental property on a letting website or in a newspaper.
However, she added: "If a landlord is letting by word of mouth it's difficult to see how HMRC would pick them up, other than by anonymous tip-off."
Informal lettings "are by their nature harder to identify", said the HMRC spokesman, though he added: "You'd be amazed at how many people 'dob' each other in."
If you believe your landlord is dodging tax call the tax evasion line on 0800 788 887. For landlords, details of how to make a disclosure are at gov.uk/let-property-campaign, tel 03000 514 479
Tax breaks for private landlords are £5bn a year, according to recent analysis by thinktank the Intergenerational Foundation. Its report, Why BTL equals Big Tax Let-off, argued that relief for landlords is unfairly generous and a significant "public subsidy" for the wealthy. The tax breaks have fuelled the buy-to-let boom, it said, making it harder for first-time buyers to get on the housing ladder.
Landlords can offset a range of costs against rental income to reduce their tax. They get relief on mortgage interest – a relief scrapped for owner-occupiers more than a decade ago – and expenses such as house insurance premiums. They can also claim a "wear and tear" allowance of 10% of the rent on furnished rental properties.
According to HMRC, about one million landlords claim relief on a total of £6bn of mortgage interest a year, saving each an average £2,000 in tax. Another £7bn a year of deductions are claimed for property repairs, maintenance and other costs.
Overall, half or more of the total rental income declared by landlords is eaten up by expense deductions, significantly reducing the tax payable. And where landlords' tax-deductible expenses exceed the rent, they can carry forward the "rental loss" to reduce their tax in future years.
Defenders of buy-to-let tax breaks say that reliefs such as deducting loan interest are no different to those enjoyed by any business.
