HMRC are chasing the Rigsby’s of this world.
HMRC, overflowing with the milk of human kindness, is offering private landlords a last chance to declare any rental income and avoid draconian penalties if they ‘fess up now.
Most of us, have suffered at the hands of private sector landlords, at one time or another and I therefore find it hard to sympathise with most of them. This is especially so, for those individuals who piled into the buy to let market with easy credit from the banks and helped fuel soaring house price inflation.
I can perhaps forgive someone who in later life has inherited their mum’s house and who has never had any dealings with HMRC nor, in most cases, ever filled out a Tax Return. In these cases, they usually only rent out the property to supplement their retirement income and have no idea that they have a potential tax liability. My sympathy however, does not extend to those individuals who enter the property rental market purely to make an easy buck.
From my long experience, I believe that HMRC are on to something here, because I’ve found that the income most likely to be omitted from many people’s returns is rental income. Most people in this situation will usually offer one of two excuses:
- I pay more in mortgage repayments than I get in rent (that may well be so, but some of the mortgage payment is capital and therefore doesn’t count)
- With all the hassle and time I spend on the property it doesn’t make a profit (Oh yes it does, because your time and inconvenience is not tax deductible)
(And don’t get me started on income from that holiday apartment in Tenerife not being declared either here or in Spain with the claim, we only let it to friends and family).
In reality, a buy to let property normally doesn’t make a profit for a year or two because of initial costs and refurbishments, and by the time it is making a profit, the thought of declaring the income has faded from the mind.
Until the credit crunch, the rental property market was encouraged by all banks and marketed as a get-rich-quick scheme, with the hook being that the rent covered your mortgage (plus some pocket-money). They trumpeted that at the end of the mortgage you would get a big fat capital gain thanks to house price inflation. They also encouraged people to use that gain as collateral and extend their borrowing and buy more and more properties.
The private rental market would not have existed in its present form, without shorthold tenancies and housing benefit. Landlords could throw the tenants out and charge an even bigger amount to the next tenant. And if the tenant lost his or her job, in most cases the council would come riding over the hill and pay their rent for them.
The unfortunate effect of easy credit combined with generous housing benefit helped fuel the house inflation bubble, with the knock-on result of forcing rents even higher. The ever spiraling rents meant that young people in particular, could not build up savings to buy their own house and were thus prevented from owning their own homes.
I am not against private landlords, per se, but I do have a beef with those individuals who are in it for a quick profit and hang the consequences. So if the HMRC crackdown manages to put off these people from this particular get-rich-quick type of investment, I for one will not be upset.
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David Jones is the Senior Partner and Founder of Morgan Jones & Company. Born in Liverpool and an Accountancy graduate of the University of Wolverhampton, David spent twenty years working for the Customs & Excise in London then Shrewsbury before starting his own business. David's depth of knowledge of the UK tax system and his ability to communicate this learning has seen Morgan Jones & Company grow into Shropshire's most respected Accountancy Practice.