HMRC have been running a Let Property Disclosure campaign for some time now and over the last 12 months more people have come to me asking for advice in making a disclosure under the scheme. Many people incorrectly think that if their expenses are exceeding their letting income that it isn't necessary to disclose their lettings on a self assessment return.
If you're in that position you may well ask " what's in it for me if I take part in the disclosure campaign?" You will need to disclose what properties you own, how long you've had them, what income you've received and what expenditure you've incurred. If there is a taxable profit you will have to pay tax, interest and penalties and so at first sight you may think there's no real incentive to disclose under the campaign. However that's not the case.
If you do not disclose and HMRC investigate the tax recovery and penalty position will be at a much higher level. It's also an opportunity for you to put things right and not have any worry going forwards of if you are going to get an HMRC investigation in the future. As the world becomes more digital the likelihood of HMRC discovering a failure to report property income becomes more likely.
A big expense for some landlords can be payments under a buy to let mortgage. Up until 5 April this year mortgage interest (but not capital repayments) could be deducted from letting income as an allowable expense. This is no longer the case and over a four year transition period relief will no longer be given in this way. Instead of being a deductible amount a tax credit at basic rate will be given for mortgage interest payments.
Depending on your circumstances this change can increase your tax liability. For higher rate taxpayers relief for mortgage interest will effectively be at basic rate rather than higher rate and this will increase the tax liability. As the profit on lettings will be higher this will take some taxpayers over the £100k income level, thus causing a restriction of personal allowances. Basic rate taxpayers may also be affected and this change could push them into higher rates even though they do not regard their net income as having changed.
For some with buy to let mortgages on residential property they will be best advised to reduce their property portfolio and lower the gearing on their property business. Capital gains tax will need to be considered in such cases. For others incorporation of their property business may provide an answer, but careful consideration will need to be given to the impact this may have on SDLT charges. A gradual transition into commercial property lettings may be another alternative.
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