In the 2024/25 tax year alone, HMRC compliance crackdowns saw landlords pay a total of £107 million in tax owed on undisclosed earnings – an average of over £13,500 each. That is more than double the amount recovered just three years earlier.
Allison Thompson, National Lettings Managing Director at Leaders, warns that “failing to declare your income and gains correctly and therefore not paying enough tax on your profits can lead to fines and criminal prosecution, and it’s just not worth the risk.”
She says: “Landlord tax is a hugely complicated area, so if you are investing in buy-to-let or renting out any property you own, it’s well worth consulting a specialist property tax adviser.”
A specialist property tax adviser can help ensure landlords are as tax-efficient as possible with their investments, whilst remaining compliant with all the latest HMRC rules.
Here are five of the most common landlord tax mistakes:
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Not taking professional advice
Landlords should seek advice before investing to ensure their buy-to-let business, no matter how small, is set up in a tax-efficient way. Good advice ensures you meet all legal and tax obligations, and don’t lose benefits or allowances that could make you worse off.
The cost of advice is minimal compared to the penalties and lost opportunities from getting it wrong.
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Misunderstanding income division rules for couples
When properties are jointly owned, spouses and partners often arrange for the lower earner to receive a larger share of the rental income so their household pays less tax overall.
Thompson explains: “This is perfectly legal, but the income split must be reflected in the property ownership – i.e. if you want one person to receive 70% of the rental income, they must own 70% of the property.”
HMRC actively looks for this mistake, and getting it wrong can mean significant tax bills backdated over multiple years.
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Deducting expenses that are not allowed
Expenses are a complex area where it’s easy to make errors. Landlords can only deduct certain items from income on their self-assessment return – revenue expenditure, such as repairs to furnishings. Other items can and should be deducted from capital gains – capital expenditure, such as installing an upgraded kitchen.
Allowable revenue expenses include those incurred in the day-to-day running of the business and training that reinforces existing skills. But landlords cannot claim the cost of learning a new skill, no matter how helpful.
Thompson notes that “this is one area where having an accountant who’s experienced in the buy-to-let field can really pay dividends.”
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Making errors completing self-assessment returns
Some landlords don’t realise they need to complete a self-assessment return at all. This particularly affects PAYE employees who’ve inherited a property, or those whose rental profits are well below the tax threshold.
As mortgage interest is no longer fully deductible, some landlords will owe tax on rental income that doesn’t actually generate a profit. Understanding all the various tax obligations before buying a rental property is therefore essential to ensuring it stacks up financially.
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Misreporting capital gains
When a rental property is sold or passed on, tax is usually due on the gain. What landlords often get wrong, particularly those who’ve remortgaged and released equity over time, is that the gain is the difference between the original purchase price and the sale price, not the amount of capital left on completion.
Thompson gives the example of someone buying an investment property for £250,000 with an 85% LTV mortgage. If, after ten years, it’s worth £350,000, she says, and you remortgage it at 85% LTV, it would only have £52,500 in equity. Then, she adds, when it reaches £400,000, if you remortgage again at 85% and then sell it two years later for that same amount, there’s only £60,000 of equity left. The gain, though, from the purchase price is £150,000, and that’s what the CGT will be calculated on.
How to deal with historic non-compliance
In 2013, HMRC launched its Let Property Campaign, which allows landlords to voluntarily disclose any unpaid tax on rental income and minimise or avoid penalties. Since then, more than 100,000 disclosures have been made, representing just over 4% of total UK landlords.
Landlords who believe they have undisclosed income should contact HMRC first. They then have 90 days to calculate and pay what they owe, with penalties ranging from 0% to 35% of the tax.
Thompson warns: “If you don’t volunteer this information and HMRC finds out, you are likely to get higher penalties of up to 100% and may face criminal prosecution.”
Voluntary disclosure is always the better option.
