Renewed focus from HMRC on second property income and capital gains

HMRC has received new data allowing them to better combat the evasion of tax in relation to undisclosed rents. They have also taken steps to identify taxpayers who may have failed to disclose potentially taxable property sales.

Undisclosed rents and data from Airbnb

We are aware that taxpayers are being approached by HMRC in relation to second properties where they cannot see that rental income is being disclosed via the owner’s tax return. Of course, many second properties are indeed simply that, a second residence, but in some cases, they will be investments actively creating taxable income in the form of rental profits that should be disclosed.

HMRC has always had access to the Land Registry and targeting individuals with more than one residential property is not a new thing. But, this recent shift of focus was most likely prompted by the receipt of data from Airbnb that will have allowed them to better assess the potential tax loss to the Exchequer and decide to utilise resource to recover those amounts.

It is important to also note that whilst HMRC’s current campaign is focused on UK residential property, letting income from properties situated outside of the UK is still, in most cases, subject to tax if the owner is tax resident here. This is still the case if tax is being paid on the income received overseas, though foreign tax credit relief is likely to be available.

At present HMRC still has the ‘Let Property Campaign’ disclosure facility available for those looking to make a submission in relation to previously undisclosed property income (there are other issues that can be addressed through this medium, but all other options should be considered). It is essential that on recognising that there is a failure to disclose income, the taxpayer approaches HMRC to make a disclosure.  Not only is this a requirement, it is also the best way to mitigate any potential penalties that you may face.

Nudge letters and second home sales

HMRC will be contacting some individuals that have sold second properties in the last tax year (2018/19) that they do not believe have been reported. These ‘nudge letters’ will take a familiar form to those issued in relation to overseas accounts, and will invite taxpayers to consider whether the sale was properly reported. My colleague Hetal Sanghvi has written on the subject of ‘nudge letters’ in the last few months in the context of overseas accounts, for more information click here.

Whilst we do not expect the exercise to be limited to the last tax year going forward, for those who have made disposals and did not report them, or believe corrections to the calculation of the gain may be required, the amendment window is still open. Again, early action and disclosure will limit penalties and interest and is a requirement.

Action required

Those taxpayers who have any concerns that income or gains have not been disclosed should take advice to establish what remedial action, if any, is required to be taken. At present, there are multiple HMRC disclosure facilities that can be used, all with a number of pros and cons, and navigating that framework is complex. In addition, establishing HMRC’s ability to assess earlier years and penalty exposures is a key part of any disclosure process. Early action is always key and a prompt, well considered disclosure will almost certainly lead to a better overall outcome than one would be faced with if HMRC was to open an enquiry under its own volition.

If you would like to discuss any of these issues further, please contact Sean Bannister or any member of the Tax Team.

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