Ignoring telling HM Revenue & Customs about rental income is no longer an option for landlords who face a barrage of fines for missing tax return filing dates.
Landlords who think they can get away without declaring rental homes or paying tax have a rude awakening ahead.
HMRC has identified around 1.4 million private landlords in the UK – and reckons only 500,000 of them are filing tax returns.
Landlords who treat their property rentals as a hobby need to get a grip with running their properties as a business.
The next round of tax deadlines is just around the corner and landlords who do not file tax returns face some harsh financial penalties.
Two key facts work against landlords who ignore their tax filings –
- The law says the obligation is on the landlord to file the tax return regardless of whether HMRC asks for one or not
- The general rule is tax follows ownership of the property, so the person who benefits from proceeds should file the return regardless of who manages the property
Taken together that means if you own a letting property, you must tell the tax man and file a tax return, even if the rental is managed by a letting agent or a friend or relative.
Landlords who do not file a tax return can expect a tax assessment through the post based on figures more or less plucked out of the air by HMRC.
The assessment must be paid within a strict time limit and interest is charged on delayed payments.
From a financial standpoint, it’s sensible for landlords and property investors to file their own figures, which could show a loss rather than a taxable profit, which the assessment will deliver.
Tax return deadlines
The current countdown is to January 31, 2014. On that date property owners should file a self-assessment tax return detailing rental income and expenses for the year April 6, 2012 until April 5, 2013.
Any balancing payment to adjust tax for the previous year is made with the return – or an application for a refund.
Then, the first payment on account for next year’s tax is also due.
Here’s an example of how the penalties can build up –
Mr L’s tax return is due on January 31, 2014, but HMRC doesn’t receive it until August 5, 2014. As the delay is more than six months, he must pay:
- A £100 fixed penalty for being a day late
- A £900 penalty – this is £10 each day from 1 May to 29 July, when the maximum 90 day penalty is reached.
- £300 or 5% of the tax due – whichever is the higher
That’s a total of at least £1,300 even if no tax is owed.
If the delay exceeds six months, the penalties increase.
Tax payment deadlines
January 31, 2014 – Landlords will need to pay one or both of the following:
- A balancing payment of any tax outstanding for the previous tax year
- The first of two ‘payments on account’ for the following year’s tax, providing your total tax bill reaches certain thresholds
July 31, 2014 – This is the deadline for the second payment on account
Interest charges for late tax payments
Besides fines, late payments of tax also incur interest at a daily rate plus penalties.
Property business record keeping
One of the main issues for landlords is they do not keep good financial records and do not understand how to keep business books that provide the basic figures for their tax returns.
One solution is a simple Excel 2010 spreadsheet Property Tax Calculator for Landlords.
The calculator produces tax return figures for up to four owners running an unlimited number of buy-to-let; HMO or holiday lets, even if the property portfolio is mixed.
The calculator comes with a step-by-step guide in plain language, a property business expenses fact sheet and free online support.
The aim is to let landlords and property investors up their game to keep the right business records without the need of an expensive accountant.
The calculator costs £29.99 and is available to buy and download online.