HMRC Let Property Campaign: Disclosure for Landlords Explained

Joe Brough explains how the let property disclosures scheme works, and offers some tips for making a successful disclosure. 

If a taxpayer has underdeclared their property income, whether unknowingly or deliberately, the ‘Let property campaign’ (LPC) allows them to make a full disclosure to HMRC to rectify their errors.  

What is the LPC?  

The LPC (see https://tinyurl.com/HMRC-LPC-Diclosure) is a facility which allows taxpayers to disclose previously underdeclared property income to HMRC, and pay the outstanding tax, penalties and interest due. Making an unprompted disclosure allows taxpayers to make an offer to HMRC to settle any tax and penalties which may be due, on terms which are more favourable than if HMRC discovers the error during an enquiry. 

Despite being called the LPC, not all types of let property income are included. The disclosure facility can only be used by individuals who owe tax on residential property income. This means that companies and trusts are excluded; however, the representatives of a deceased estate can make a disclosure. 

The types of residential property income that can be disclosed include: 

• income from single or multiple properties; 

• income from furnished holiday lets; 

• income from the ‘rent-a-room’ scheme; and 

• income from renting out a residence during a period of absence. 

How does it work? 

Once a taxpayer discovers that they have underdeclared their rental income on which tax is due, they will need to inform HMRC via an online submission that they intend to make a disclosure. If the undisclosed rental income does not result in a tax liability, a disclosure would not be required. 

At the initial stage of disclosing to HMRC that a submission will be made, no details of the rental income, or any indication of the tax due, need be made. This will come later when the final submission is made, which must be sent within 90 days of the initial notification being sent to HMRC. 

The final submission will include details of any underpaid tax for each year, along with an offer to settle any interest and penalties which may be due. At the time of submission, the taxpayer will pay the offer amount to HMRC, who will then review it. 

What period does a disclosure need to cover? 

The length of time that a disclosure covers will depend on the taxpayer's actions and the reason for the underdisclosure of rental income. The maximum length of time a disclosure can cover is twenty years, although shorter periods can be accepted if HMRC believes that a taxpayer originally took reasonable care in ensuring that their tax returns were correct. 

For example, if a taxpayer has not registered for self-assessment, which should be done no later than 5 October following the end of the tax year, or has deliberately misled HMRC regarding their rental income, the maximum twenty-year period will be applicable. 

However, where a taxpayer has registered for self-assessment on time, and has taken reasonable care in disclosing their affairs, but an underdeclaration has still arisen, the maximum period is four years. In situations where the taxpayer has been careless, the maximum period rises to six years. 

Calculating the rental profits 

In order to calculate the tax due, the rental profits for each year need to be worked out. These should be calculated as normal, bringing into account all rental income and expenses which are incurred ‘wholly and exclusively’ for the purposes of the rental business. 

A disclosure may cover tax years where there have been changes in the deductibility of certain types of expenses. When working out the rental profits, it is important that the correct rules are applied to each year and adjusted for accordingly. 

Deductibility of mortgage interest and finance costs 

Up to the end of the 2016/17 tax year, mortgage interest and related finance costs were deductible in full as an expense. However, from the start of 2017/18 to the end of 2020/21, a restriction on finance costs was phased in, with the balance of the finance costs given as a basic tax reducer as follows: 

• 2017/18: 75% of costs deductible from rental income; 

• 2018/19: 50% of costs deductible from rental income; 

• 2019/20: 25% of costs deductible from rental income; 

• 2020/21 onwards: 0% of costs deductible from rental income. 

Wear and tear allowance 

For tax years up to and including 2015/16, the wear and tear allowance was available to landlords of furnished rental properties to allow for the costs of repairing and replacing furnishings instead of claiming actual costs. The wear and tear allowance could be claimed each year, whether there was actually any expenditure or not. This could prove useful for disclosures that predate its abolishment, as evidence of actual expenditure may no longer be available. 

However, from 2016/17 the wear and tear allowance was abolished and replaced with the ‘replacement of domestic items relief’, which is currently in use for calculating rental profits. 

Calculating the tax due 

Although the LPC is only for underdeclarations of residential income, in order to work out the correct tax due, a taxpayer will have to ensure that all of their income for each tax year is included in the calculations. The inclusion of rental income could also have other implications which will need to be considered.  

For example, if a disclosure was being made for 2019/20, which resulted in an individual’s income rising above £50,000, a clawback of any child benefit entitlement may need to be built into the calculations. 

Additionally, it is important to calculate and track any rental losses as these can be carried forward and used against any rental profits of future years, which may reduce the overall tax liabilities, interest and penalties. When carried forward, rental losses must be used in full and cannot be restricted to preserve the personal allowance or deferred for later use against income taxed at a higher marginal rate. 

Interest and penalties 

As part of making the disclosure to HMRC, the offer will need to include a calculation of the interest and penalties due to HMRC. 

Penalties are calculable by reference to a taxpayer's conduct, and depend on whether the disclosure is rectifying an inaccuracy in a return, or whether there was a failure to notify HMRC of the liability to tax.  

The range of penalties to be applied to each year for an unprompted disclosure is: 

Penalties are calculated based on the ‘potential lost revenue’ HMRC has suffered. In normal HMRC enquiries, a deduction from the maximum penalty chargeable will be given depending on the level of assistance given to HMRC during their enquiry. 

Under a LPC disclosure, the level of reduction will need to be self-assessed and applied accordingly. Whilst every case would be judged on its own merits, HMRC does state that where there has been a delay of more than three years in correcting non-compliance, it is unlikely to accept a penalty reduction by more than ten points above the minimum rate. 

Interest is chargeable on the tax element only, and runs from the normal due date it was payable, up until the date of settlement. This should be calculated for each year in isolation, and then aggregated in the final disclosure.  

Practical tip 

Making a LPC disclosure allows a taxpayer an opportunity to settle their affairs with HMRC on more favourable terms than if an enquiry were raised. It is therefore important that when completing the submission, full disclosure is made to prevent any further criminal or civil proceedings arising.