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HMRC’s “nudge” tactics expand to rental income

HMRC’s “nudge” tactics expand to rental income

We have published four articles in which we focused on HMRC’s increasing use of so-called “nudge letters”, and there are further developments to report. The most frequent scenario is that HMRC receives information that a UK taxpayer has received typically overseas investment income or gains (most likely through one of the automatic information exchange agreements from one of many participating jurisdictions) and those receipts have not been declared on their UK tax return. HMRC prompts the taxpayer, in writing, either to certify that their tax returns are correct or, if not, they should put things right by making a disclosure of unpaid tax.

In recent weeks HMRC has expanded this direct approach by focusing on the payment of rents to overseas owners of UK residential property.

Who are these letters being sent to?

In recent weeks a wave of new nudge letters have been issued to non-UK resident owners of UK residential property (possibly a company or overseas trust). However, and perhaps more worryingly, letters have also been received by tenants of those properties.

What are the letters getting at?

The nudge letters remind UK property owners of the non-resident landlord scheme and ATED regime (Annual Tax on Enveloped Dwellings). They prompt recipients to register, as necessary, and to consider returns which ought to have been filed. We note that there is an obligation to submit a nil ATED return (a “relief declaration return”), so even if no ATED tax is due, there may have been a failure. For example, if no ATED tax is due because full market rent has been paid, then there should have been a non-resident landlord return, but if a relief declaration return hasn’t been made, there have been two failures.

Tenants, on the other hand, are reminded of their responsibilities to deduct tax in certain circumstances on their payment of rents to overseas owners. However, they are also asked to provide details regarding the owner of the property including the ownership structure. If a tenant is paying rent to a UK letting agent, then they have no responsibility to withhold tax, and therefore no responsibility to inform themselves about the owner. If the property is owned by a trust with a life tenant, then the trustees may mandate the income direct to the life tenant, and they are not taxable on the rental income. HMRC are able to establish from the Land Registry who the legal owner of the property is. Thus, asking the tenant who they think owns the property is likely to cause confusion which will be expensive to sort out.

What should overseas owners of UK property do?

A review of UK property owners’ exposure to the non-resident landlord and ATED regimes is highly recommended. Financial settlements with HMRC can be expensive. Costs can be reduced by an unprompted accurate disclosure, paying any tax and interest due, before the start of any correspondence on mistaken facts.