As HMRC steps up its search for landlords with undeclared rental income, Donna McCreadie, a buy-to-let specialist at Perrys Chartered Accountants, explains the importance of ensuring records are up to date and what to do if you receive a worrying letter from the Inland Revenue. Since the government launched its Let Property Campaign in 2013, an initiative which allows landlords to declare unpaid tax in return for a discounted penalty, more than 58,000 disclosures have been made and approximately £250 million has been recovered in unpaid taxes.

Despite this success, HMRC has been intensifying its efforts to track down landlords with undisclosed income and many are now facing demands for back payment of taxes and associated interest, as well as large fines.

Penalties for undisclosed income can be hefty, ranging from 10 per cent and rising to 100 per cent of the rental income in some cases.

Those who receive letters demanding payment from HMRC will pay substantially more in fines compared to those who declare their income voluntarily.

HMRC are hunting for those who don't declare rental income

Whether you are a seasoned investor or new to letting property, it is vital you keep your income and expenditure records up to date and declare any rental income to HMRC in line with its relevant self-assessment deadlines.

There are many reasons why someone might not have declared rental income to HMRC. In some cases, this could be because an individual became an “accidental landlord”. For example, you were forced to let out a home that couldn’t be sold.

However, HMRC has numerous ways to find individuals who haven’t declared rental income, and their resources for investigating are extensive.

These include gathering information from HM Land Registry and Stamp Duty tax returns, reviewing reports from lettings agents and tenancy deposit scheme providers, carrying out online searches, making door to door enquiries, receiving reports from members of the public and collecting information from other government departments, such as the electoral register.

The law allows HMRC to go back up to 20 years and, in some cases, it may carry out a criminal investigation. Regardless of your reasons and no matter how overwhelming it might seem, it is important to remember that not declaring rental income is a criminal offence and the longer you leave it, the bigger the tax bill and penalty.

The good news is, there is professional support available to help you navigate the system and get your tax affairs in order.

However, undisclosed rental income can affect chances of getting a mortgage. Any mortgage application you make will use your income to calculate how much money you can borrow as well as the interest you will pay.

If you have not declared your rental income, then this amount cannot be accounted for as part of the application process as you will be unable to prove you are receiving it.

More importantly, you might also find that you are unable to refinance your rental property at the end of a fixed term rate. This is because lenders will require copies of your tax returns, which show what rental income has been declared.

Do not wait until you receive a letter of demand from HMRC. Instead, you should speak to a specialist buy-to-let accountant like Perrys, who will be able to guide you through the process, calculate the tax you owe and ensure any mitigating factors are correctly applied.

Be prepared as HMRC is on the hunt for landlords who have not declared rental income