If you are in receipt of UK rental income you are required to complete and submit an income tax return to HM Revenue and Customs (HMRC). A potential tax liability arises on the net rental income received from the properties i.e. rent less expenses. Allowable expenditure includes rates, insurance, repairs and any utility usage not covered by the tenant. Relief is also available for the interest element of any finance or loan used to purchase the property. For furnished lettings a further wear and tear allowance is also available being 10% of the gross rental income less rates.
The liability to tax depends on your other sources of income. For 2011/12 tax year, if your total sources of income (including your net rental income) less your personal allowance of £7,475 are less than £35,000 you would pay tax at 20%; if between £35,0001 – £150,000 you would pay tax at 40% and if greater than £150,001 you would pay tax at 50%.
HMRC receive returns in relation to all tenants who are funded by government agencies such as NIHE/DHSS. It is therefore essential that personal tax returns are made to prevent an investigation which may result in back taxes, interest and penalties. If returns have not been made a voluntary disclosure should be made to HMRC for each year that you have received rental income. It is also important that you can demonstrate in many cases how the property acquisition was funded.
A penalty and interest would be charged on any unpaid tax. The level of penalty can range from 0% to 100%. However for a voluntary disclosure it is likely that the penalty could range from 0% to 30%. This is an area where HMRC are attempting to recover significant unpaid tax and have issued letters recently to individuals who they believe have been in receipt of rental income which has not been disclosed or taxed. If you find yourself in such a position take professional advice as action taken now could significantly mitigate any penalty.
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