What specific tax changes are HMRC focusing on for landlords that led to £104m in recoveries?
Quick Answer
HMRC's £104m in recoveries from landlords primarily stems from non-compliance with Section 24 mortgage interest rules, correct Capital Gains Tax on property sales, and accurate reporting of residential rental income and Stamp Duty Land Tax.
## What Areas of Tax Are HMRC Targeting with Landlords?
HMRC's focus for landlords, which has led to significant tax recoveries, primarily revolves around undeclared rental income, inappropriate expense claims, and Capital Gains Tax (CGT) on property disposals. These areas consistently offer the largest scope for discrepancies when property investors complete their self-assessment tax returns. According to HMRC's own data, their compliance activities are highly targeted, using information from various sources to identify landlords whose tax affairs might not be entirely accurate.
### Undeclared Rental Income
Many landlords, particularly accidental landlords or those with smaller portfolios, sometimes fail to declare all their rental income. HMRC has sophisticated data analytics capabilities, cross-referencing information from land registries, letting agents, tenant deposits schemes, and even online advertisements, to identify properties that are being let out. This allows them to identify landlords who may not be declaring this income, or who are under-declaring it. A landlord receiving £1,000 per month in rental income, and failing to declare it for a year, would effectively owe income tax on £12,000. For a higher rate taxpayer (42% from April 2027), this equates to £5,040 in unpaid tax for just one year, excluding penalties and interest.
### Incorrect Expense Claims
Another significant area of scrutiny is the claiming of inappropriate expenses. While many property-related expenses are legitimate, such as repairs, insurance, and professional fees, some landlords mistakenly claim capital expenditure (improvements to the property) as revenue expenditure (repairs). HMRC also focuses on personal expenses being incorrectly categorised as business expenses. For individual landlords, mortgage interest is no longer a deductible expense since April 2020 due to Section 24; instead, a 20% tax credit is applied. Claims for full mortgage interest deductibility for individual landlords would immediately flag an issue. For instance, a landlord incorrectly claiming £8,000 in personal expenses as property expenses, and paying the higher rate of income tax (42% from April 2027), would owe an additional £3,360 in tax.
### Capital Gains Tax (CGT) on Property Disposals
CGT is charged on the profit made when selling a residential property that is not your main home. Basic rate taxpayers pay 18%, while higher/additional rate taxpayers pay 24% on gains. With the annual exempt amount reduced to £3,000 for 2026/27, more of any gain is now taxable. HMRC checks for under-declaration or non-declaration of CGT, especially where properties have been owned for a long time and significant value appreciation has occurred. For example, selling a buy-to-let property with a taxable gain of £50,000 after deductions could result in a CGT liability of £12,000 for a higher rate taxpayer. Non-declaration or miscalculation of this could lead to substantial penalties.
### Additional Dwelling Stamp Duty Land Tax (SDLT) Surcharge
While not a direct income or CGT issue, HMRC also monitors compliance with the 5% additional dwelling SDLT surcharge. This is levied on top of the base residential rate for buy-to-let or second properties. Failure to pay the correct SDLT at the point of purchase can lead to significant penalties later. For a property purchased at £250,000, the additional dwelling surcharge alone would be £12,500 (5% of £250,000), on top of the standard rates.
## Understanding the Impact of Non-Compliance
For investors, the £104 million in recoveries highlights that HMRC is serious about compliance. They are not merely relying on random checks; their approach is data-driven and targeted. This means that if there are discrepancies in a landlord's tax returns, there is an increased likelihood of HMRC identifying them. The consequences of non-compliance can extend beyond just paying the overdue tax; penalties can be as high as 100% of the tax due, in addition to interest charges. Also, HMRC can investigate up to six years of tax returns, or up to 20 years in cases of deliberate evasion.
## Investor Rule of Thumb
Always ensure full transparency and accuracy in all tax declarations, as HMRC has advanced data matching capabilities to identify discrepancies, making non-compliance a high-risk strategy.
## What This Means For You
Most landlords don't intentionally commit tax fraud, but misunderstandings of complex tax rules, like Section 24 or what constitutes a valid expense, can lead to costly errors. If you want to ensure your property portfolio is structured and managed in a tax-efficient and compliant manner, understanding these nuances is exactly what we focus on inside Property Legacy Education. We help you establish robust accounting practices and tax knowledge to safeguard your investment.
Steven's Take
The £104 million recovered by HMRC isn't about landlords doing anything illegal; it's often about landlords not knowing the rules. I've seen it time and again, where property owners make genuine mistakes with expenses or declare their income incorrectly because they aren't keeping up with the legislation. The Section 24 changes are a prime example - many still don't fully grasp its implications. HMRC has got clever with data. They're not just guessing; they're connecting dots from various sources. This means that if your figures are off, it's increasingly likely they'll find out. Understanding what you can and can't claim, and how to structure your property ownership, is more critical than ever to protect your returns.
What You Can Do Next
Review your last 3-4 years of self-assessment tax returns: Check for any undeclared rental income or incorrectly claimed expenses against current HMRC guidance, particularly regarding mortgage interest relief and capital vs. revenue expenditure.
Consult a qualified property tax accountant: Engage a specialist in UK property tax to review your current tax position and advise on compliance; they can often highlight areas of concern or potential optimisation. Find one via the ICAEW (Institute of Chartered Accountants in England and Wales) or ACCA (Association of Chartered Certified Accountants) directories.
Check gov.uk/capital-gains-tax-property for current CGT rules: If you have sold a residential property that isn't your main home in the last few years, ensure you've correctly reported and paid any CGT due. Confirm the annual exempt amount and appropriate tax rates.
Verify your SDLT payments: If you've purchased a buy-to-let or second home since April 2016, ensure the additional dwelling surcharge was correctly applied. Refer to gov.uk/stamp-duty-land-tax to confirm the rates and calculations for your property's value.
Keep meticulous records: Maintain clear, organised records of all rental income, expenditure, and property purchase/sale documents for at least six years, as HMRC can request these during an enquiry.
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