There are various types of individuals who will reach out to PKF Smith Cooper for support in declaring historic rental income: for example, those who are concerned about potential investigations by HMRC, those who have recently found a compelling reason to begin reporting their income, those who were genuinely unaware of the requirement to report their rental income, and those who seek peace of mind by fulfilling their reporting obligations. We can help you understand what you need to do when declaring rental income to HMRC.
Do I need to pay tax on my rental income?
In short, yes. Every property owner must pay tax on their rental income and it is subject to the same Income Tax rates and thresholds that apply to your personal income. Be aware that when combined with other sources of income, such as your employment or self-employment income, your net rental income could cause you to fall into a higher tax bracket than usual. The reporting requirements are as follows:
Rental Income of less than £1,000 before allowable expenses – No reporting requirements necessary
Rental Income between £1,000 – £2,500 – Contact HMRC as there could be a simplified way to declare your rental income. If you are unsure about how to do this, get in touch with one of our tax experts who can support you in declaring your rental income.
Rental Income between £2,500 – £9,999 after allowable expenses, or £10,000 or more before allowable expenses – Your rental income will need to be reported on a Self-Assessment Tax Return.
How do I calculate my rental income?
Your rental income is the rent you receive from your tenants as well as any funds you receive for covering various service charges. You can help reduce your rental profits by deducting the expenses you incur when letting out a property, which are known as ‘allowable expenses’. Some examples of allowable expenses include:
- Water rates, council tax, gas and electricity
- General maintenance and repairs
- Landlord insurance
- Costs of services, including the wages of cleaners and gardeners as part of the rental agreement
- Letting agent fees and management fees
- Rents, ground rents and service charges
- Legal fees for lets of a year or less, or for renewing a lease of less than 50 years
- Direct costs, such as phone calls, stationery, and advertising for new tenants
Interest paid on a mortgage will attract basic rate tax relief rather than reducing your rental profits. There are also non-allowable expenses for landlords, which cannot be deducted from your tax bill:
- Enhancements or improvements to the property
- The ‘repayment’ part of your mortgage payment
- Private telephone calls
- Clothing and other personal expenses
How does HMRC find out about your rental income?
HMRC has access to information on every property and land transaction. This includes property registers, land registry data and third-party reports, which allows HMRC to identify individuals who may be receiving rental income. They are also able to track rental income from overseas properties through international information exchange agreements and co-operation with tax authorities in other countries.
There are consequences to not declaring rental income to HMRC on time or declaring wrong information. You must tell HMRC about the error or omission before they discover it, as the full reduction in penalty will be given only when there is maximum co-operation with HMRC in correcting the inaccuracies. If you do not do this, your disclosure will not qualify to be treated as unprompted. The table below displays the range of inaccuracies and penalties:
| Type of inaccuracy | Unprompted | Prompted |
| Failure to notify HMRC of an underassessment or careless inaccuracy | 0% to 30% | 15% to 30% |
| Deliberate but not concealed inaccuracy | 20% to 70% | 35% to 70% |
| Deliberate concealed inaccuracy | 30% to 100% | 50% to 100% |
What should I do if I have not previously declared rental income to HMRC?
HMRC are more likely to consider your case more favourably if you reach out first to declare your situation, so it is important to rectify the situation by making a voluntary disclosure and paying any outstanding tax. HMRC can investigate rental income as far back as 6 years in most cases and up to 20 years in cases that involve deliberately non-compliance or fraud in which they may also carry out a criminal investigation.
If you are a landlord and you have any undisclosed income, you must declare any unpaid tax to HMRC now. Once the unique reference number is provided through the disclosure scheme, you will have 90 days to work out how much is owed.
How can we help?
At PKF Smith Cooper, we are seeing a lot of new clients reaching out to us for advice on how to pay income tax on their rental income. Contact one of our tax experts for assistance on disclosing historic income to HMRC and for any further information and advice on declaring your rental income.
