HMRC activity in the Real Estate sector

The fight to tackle tax non-compliance continues to evolve alongside HMRC’s commitment to reducing the tax gap. One to Many (or 'nudge') letters are often used to target risk areas, aided by the growing database of information available to the government. 

Individual landlords

Individuals who let out property must declare rental profits to HMRC annually on their self-assessment tax returns. In addition, Capital Gains Tax must be paid when profit is made upon disposal (with returns now due within 60 days of completion for residential property). Whilst these requirements should be relatively well known, there are many errors and widespread non-compliance by landlords, hence the launch of the Let Property Campaign (LPC) over a decade ago. 

Over the years, we have helped our clients make disclosures resulting from the below:

• Misunderstandings about which expenses are deductible for tax purposes (most notably, mortgage capital) and whether there is a taxable profit despite being a cash loss.
• Incorrect assumptions about which party must declare the profits (e.g. when married couples or civil partners jointly own property or the effect of separation and divorce).
• Misunderstandings relating to legal, rather than beneficial, ownership of a property.
• Not being proactive in registering for self-assessment and then being fearful about the consequences of coming forward late.
• Non-resident landlords who have failed to comply with their requirements under the NRL scheme.
• Not realising that a gift of property is treated as a capital disposal, with the open market value being substituted for the proceeds.
• Deliberately not declaring profits to evade tax (for which an alternative route, the Contractual Disclosure Facility.

The LPC is a relatively straightforward digital route that enables individual landlords to come forward and correct the tax position on undisclosed rental income and gains from residential property. 

Note: The LPC cannot be used by companies or Trusts, or individuals who solely own commercial property, although we can help resolve issues for those excluded from the LPC.

Corporate landlords

Directors of companies owning rental property need to ensure that all UK tax obligations are fulfilled. 

Profits from rental activity and property disposals must be declared on Corporation Tax returns annually. Overseas companies must also ensure requirements are met under the Register of Overseas Entities, Non-Resident Landlord scheme and Non-Resident Capital Gains Tax regime. 

Annual Tax on Enveloped Dwellings (ATED) must be considered when companies own UK residential property worth more than £500,000. Whilst there are various reliefs available which may limit the ATED payable, there is a common misconception that the reliefs are automatic, whereas, unfortunately, they must be formally claimed. ATED was introduced in 2013, so there could be multiple charges for HMRC to recover. Furthermore, HMRC can charge penalties for failure to submit returns (even where no ATED is payable), meaning this is a lucrative area for HMRC to focus on.

Ongoing activity

Scrutiny of individuals and corporate landlords is currently a huge area of focus for HMRC, given the easy access to ownership information via Land Registry and the Register of Overseas Entities. Data gathered under the Common Reporting Standard has also helped identify funds held overseas that relate to property transactions. We have seen numerous examples of HMRC challenges concerning:

• ATED reliefs claimed for commercial rent with a view to profit
• valuations of property used for ATED and CGT purposes
• The source of funds used to make the initial purchase of properties
• SDLT liabilities
• the transfer of assets abroad anti-avoidance code designed to capture UK-resident participators with direct or indirect interests in corporate structures, particularly where UK property is owned.

We are already seeing an increase in HMRC activity in the real estate sector, particularly where there is an element of offshore ownership, as it is a lucrative project for HMRC.

If you would like to discuss how these issues may affect you and how we can help, please get in touch with Hayley Ives, Caroline Fleet, or your usual Crowe contact.