A report in the Daily Mail, reveals that up to 900,000 buy to let investors and second homeowners could be investigated by HMRC.
According to the report, there are an estimated 1.4 million landlords in the UK, but only around 500,000 have registered with HMRC, leading to concerns that millions of pounds are being lost in tax receipts.
Tax on property income
Income from buy to let investments, second homes or holiday properties is subject to income tax at an individual’s highest rate.
However, expenditure, such as routine maintenance, insurance and mortgage interest can be deducted before calculating the tax due.
If the property is sold, any profit will be subject to Capital Gains Tax (CGT); this is not the case with an individual’s main residence, where any gains are completely tax-free.
It is clear HMRC is concerned people are not registering additional properties and therefore avoiding tax due on income or sale. It is also believed that over £500 million is owed retrospectively by landlords who have not declared their property interests.
Landlords who have not registered with HMRC face expensive and time consuming investigations into their affairs, which could result in fines and the need to pay tax due on income or gains from previous years.
Tax-free property income
There is however an exception, where income from a property is not taxed, namely the Rent a Room Scheme.
This allows you to rent a room, or indeed a whole floor, in your home and receive income up to £4,250 each year, tax-free.
The exemption is automatic, if the income you receive is lower than the threshold, you do not need to register with HMRC.
If you receive more than the threshold you will need to complete a Self-Assessment tax return to declare the total income; although you will only be taxed on the amount over the threshold.