What happens if you don’t declare rental income in the UK?

Benjamin Franklin once said, “Nothing is certain except death and taxes”, and His Majesty’s Revenue and Customs (HMRC) is responsible for ensuring taxes are collected in full and on time in the UK. This division of the Government includes any landlord, whether that’s a UK resident or an overseas person, who let out a property and earn rental income.

If you rent a property out in UK, even for short term, it doesn’t matter whether you have taxes to pay or not, failing to submit a tax return every year is a serious offence and will for sure lead to a big fine. And to be honest who wants any tax authority investigating or chasing you!!!

Most landlords use accountants and submit returns annually and pay the relevant taxes due, BUT those landlords who don’t declare the correct amount and fail to pay the tax due or even worse don’t submit any return and pay no tax, well then, the tax plus interest plus fines can really mount up. Landlords face fines of up to 100% of the tax they should have paid and up to 200% if they have overseas income sources.

Think of this – if compounded over 10 years, the fines, penalties and interest could amount to as much as 70% of the value of the property!!. And we calculated that if it was over 15 years or more then HMRC could take the whole value of the property just to cover all these fines and penalties… Imagine to lose a London property by not paying your tax!!! How scary is that?

And even worse, for the worst culprits, there is the chance of a prison sentence – all for not paying tax!!! That’s even more scary!! Imagine losing your property and going to prison!

So, as an overseas property investor in London, what’s the best way to ensure you’re never on the wrong side of the UK tax law? The answer is simple. Accept you can’t dodge it, so spend time in working out exactly what you need to pay, ensuring you deduct everything you are allowed to, as there are many allowable costs – a large number of Benham and Reeves clients have zero tax to pay. Remember tax is only payable on profit and there are so many deductions to make including mortgage interest and every cost related to the property… Completing your own tax return can often cost you more as you may deduct something you are not allowed to and then pay too little tax which is an offence – one example is that if you have a property in Australia but live overseas you can deduct flights against rental income but you can only do it in for UK property for very strict reasons. Or you could not include all the appropriate deductions such as an annual tax-free allowance so you end up paying too much tax.

So, the best way is to use an accountant or an agent like Benham and Reeves who have their own in-house tax return accountancy team to ensure you file correctly and importantly on time.

How do I calculate my rental income?

Calculate your annual net rental income simply by:
– Calculating all the rent you’ve received, adding on any extra monies like deposit contributions at end of tenancies or any extra monies you’ve received like contribution towards utility bills
– Add up all your expenses such as service charges, ground rent – see below which lists most of them (note that mortgage interest relief is not included in this calculation which is explained in more detail below)
– Work out the net income

Once you have this net figure you can work out which tax band you fall into. If your rental income is less than £12,570, your tax liability is nil, as it is covered under the personal allowance which applies to UK residents and certain non-residents. However, on the other extreme, if your taxable income is over £125,140, you could be paying up to 45% of it in tax.

Here are the current bands – always best to check in case they change

How to cut tax on rental income?

The only way to reduce the tax payable on rental income is by taking account of all the tax relief benefits and ensuring eligibility for them. Claiming allowable expenses, such as mortgage interest, utility bills, council tax, ground rents, etc, is the first place to start.

What are the allowable expenses for UK landlords?

As a tax-paying landlord, HMRC allows you to deduct the expenses you incur on your property for renting it out. These expenses are quite broad, covering repairs and maintenance work, service charges and ground rents, fees paid to your lettings and property managing agent, utility bills like water, gas, electricity, heating, etc, insurance paid for the property and contents in it and many more. HMRC’s website has the full list of expenses you can claim and the applicable conditions. Additionally, you can deduct mortgage interest on your buy to let (“BTL”) property, however this relief is restricted to the basic rate as explained below. This is a key area that landlords with higher rental incomes underpay tax – they deduct mortgage interest from the rent, then deduct all other expenses and pay tax on the rest. But actually, that’s often wrong and when HMRC inspect and find out then the landlord gets interest, penalties and a big fine!!

How much is the mortgage interest tax relief?

Since April 2020, HMRC changed the way landlords can deduct mortgage interest from their rental income. Now, landlords receive a tax credit equal to 20% of their mortgage interest payments. So here’s an example assuming no other income and no personal allowance available

– you have a property in London
– Receive £40,000 rent
– All expenses (except mortgage interest) amount to £5,000
– your interest is £15,000
– HMRC now calculates that you would be in the 20% band as £40,000 minus £5,000 is £35,000 so 20% tax would be £7,000
– Deduct mortgage interest of £15,000 at 20%, which is £3,000
– Therefore, there’s net tax to pay of £7,000 minus £3,000 which is £4,000

This is the same as it always was, but now let’s take an example for someone with higher rental income, again assuming no other income and no personal allowance available

– Receive £80,000 rent
– All expenses (except mortgage interest) amount to £15,000
– your interest is £25,000
– HMRC now calculates that you would be in the 40% band as £80,000 minus £15,000 is £65,000 so 20% tax due on the 1st £37,700 which is £7,540 tax plus 40% tax on £27,300 which would be £10,920
– HMRC say you can ONLY deduct mortgage interest of £25,000 at 20%, which is £5,000
– Therefore, there’s net tax to pay of £18,460 minus £5,000 which is £13,460

Here is where many make the error

– they take rental income £80,000
– Deduct £15,000 expenses
– Deduct £25,000 mortgage interest
– Gives net income of £40,000 and only pay £8,460 in tax

But you see they should actually pay £13,460 and so are underpaying by £5,000
If you did that for 5 years and were found out then with interest, fines and penalties it could be as much as £40,000 to repay

Do non-resident UK landlords have a different tax?

UK is the fairest country – tax rates on rental income are the same for everyone – both local British residents and overseas landlords – everyone pays the same – in fact it’s really worse for British people as the rental income is added to their UK salaries/income so they end up nearly always being taxed at the higher rate! Landlords who have a usual place of abode outside the UK can register with the Non-resident Landlord Scheme (NRLS). Under the NRLS, HMRC collects tax from overseas landlords via their tax returns. Landlords complete an NRL form which is sent to HMRC who then write to the letting agent (and the tenant if no agent) who then are authorised to pay full rent to the Landlord without deduction of any tax.

If however, an overseas landlord does not register the NRL form with HMRC then the letting agent or the tenant must withhold the taxes due which is usually calculated at 20% without deducting any expenses and pay this sum to HMRC every quarter. This means the landlord initially may pay more tax as some deductions may not be included and then in the annual self-assessment tax return you claim back any overpaid tax. Landlord must use form NRL6 issued by their agent as evidence of tax paid to HMRC.

What happens if I miss the UK tax deadline?

The deadline to submit your self-assessment in the UK is on 31st January after the end of the tax year, which runs from 6th April to the following 5th April. For example, if you consider the tax year between April 24′ to April 25′, your deadline to file self-assessment is 31st January 2026. Unlike earlier, when failure to file your return before the deadline resulted in an automatic non-refundable penalty, HMRC has now introduced penalty points, which when it reaches a certain threshold results in an automatic fine. The penalty differs for different income bands but is so easily preventable if you keep on top of your taxes!.

Do overseas landlords really get fined?

Yes, overseas landlords do indeed get fined – it’s not only the money – the stress of dealing with HMRC or any tax authority can be very frightening indeed. So here are 3 examples of how things went wrong for some landlords !!.

Hong Kong owner
2 bed flat in Canary Wharf
Rent of £33,800 per annum

The Hong Kong-based landlord had been receiving £650 per week rent on property without a mortgage. They had been told by a friend years ago overseas owners don’t pay any tax in the UK so they had never filed a tax return nor declared any rental income nor paid any tax for 3 years. In reality, the annual income of £33,800 was taxable under the basic rate of 20%. This negligence led to a bill of £22,446, including the tax, interest and penalties and led to HMRC insisting on a full tax inspection. This was painful and the landlord had to employ an accountant to handle which cost another £6,000.

Singapore owner
1 bed flat in Paddington
Rent of £39,000 per annum

A Singapore-based landlord received £750 per week for 5 years and yet again wasn’t aware of his tax obligations. She also had no mortgage. This went on for 5 years and the undeclared rental income was close to £200,000. After a full investigation, which again required a professional accountant who charged close to £10,000, HMRC slapped the landlord with a significant fine, which along with the outstanding tax and interest payments, led to a payment to HMRC of £44,227. That’s in addition to the accountants’ fees plus all the sleepless nights of worry!

Malaysian owner
3 bed flat in Bloomsbury

A Malaysian landlord failed to declare rental income for 10 years – he was filing his own tax returns but filed allowable expenses similar to those he did against his Australian property where flights are allowable. He claimed 4 flights every year plus 20 nights in hotels plus a full renovation and addition on a loft conversion (which cost over £100,000).

Unfortunately on investigation, HMRC rejected all the expenses and claimed a late payment penalty of £16,500 at 15% plus interest of 2.5% over the base rate for 10 years, which came to £32,920.

The cumulative tax bill and penalty over 10 years, led the owner with a whopping £67,500 payment to HMRC.

Landlords whether UK or overseas need to simply be mindful and our advice is to employ a tax expert to ensure you never under-declare your tax liability!

Benham and Reeves has a history as a leading lettings and sales agent in London with over six decades advising overseas landlords and today have a full tax accountancy team in-house handling over 1,500 tax returns for overseas landlords. So, if you are a landlord who owns a property in London which you let out and need help with taxes and other property-related services, get in touch with us.