Five tax mistakes that could be draining your rental profits

Landlord tax is notoriously complex, so if you’re investing in buy-to-let or renting out a property you already own, it’s usually worth speaking to a qualified property tax specialist. They can help make sure you:

a. Hold, let, draw income from and eventually dispose of your investment in the most tax-efficient way for your personal situation, and

b. Pay the right amount of tax to HMRC at the correct time.

If you don’t report your income and gains correctly - and therefore underpay tax - you could face fines or even criminal charges. It’s simply not worth taking the gamble.

In the 2024/25 tax year alone, HMRC’s increased enforcement activity led to landlords handing over £107 million in unpaid tax – averaging more than £13,500 per landlord. That figure was more than double what HMRC recovered just three years earlier.

Below are five of the most common misunderstandings and oversights that often result in landlords falling foul of HMRC:

1. Not seeking professional guidance

Ideally, you should get advice before you invest so your rental business – however small – is structured tax-efficiently and compliant with legal requirements. Good advice can also help you avoid missing out on allowances or benefits that could leave you financially worse off.

2. Misunderstanding how to split income between partners

Many couples allocate more rental income to the lower earner to reduce their overall tax bill. This is completely legitimate, but the income split must match the ownership split. So if you want someone to receive 70% of the rent, they must legally own 70% of the property.

3. Claiming expenses that aren’t eligible

This is one of the trickiest areas of landlord tax. Some costs can be offset against rental income (‘revenue expenditure’, such as repairing existing furniture), while others should be claimed against capital gains (‘capital expenditure’, such as fitting a higher-spec kitchen). Allowable day-to-day running costs and training that reinforces existing skills can usually be deducted, but learning an entirely new skill cannot. Having an accountant experienced in buy-to-let can prevent expensive errors here.

4. Making mistakes on self-assessment tax returns

Plenty of landlords don’t realise they must file a self-assessment return - especially if they’re paid under PAYE, have inherited a rental property, or their profits fall below the tax threshold.

A classic example is mortgage interest. Because it’s no longer a deductible expense, some landlords end up with a taxable profit even when their mortgage payments absorb most of the income. Understanding all your tax liabilities before purchasing a rental property is crucial for ensuring the numbers work once tax is accounted for.

5. Incorrectly reporting capital gains

When you sell or transfer a rental property, CGT usually applies. A common mistake -particularly among those who have released equity through remortgaging - is misunderstanding what the “gain” actually is. It’s the difference between the purchase price and the sale price, not the equity left at the end.

For example: You purchase a property for £250,000 with an 85% LTV mortgage. Ten years on, it’s worth £350,000 and you remortgage at 85% LTV, leaving £52,500 equity. Later it’s valued at £400,000, you remortgage again, then eventually sell for £400,000. Even though you only finish with £60,000 equity, your taxable gain is £150,000 - and that’s what your CGT bill will be based on.

What to do if you suspect you owe tax

In 2013, HMRC introduced the Let Property Campaign - a scheme allowing landlords to come forward with unpaid rental income and reduce or avoid penalties. More than 100,000 landlords have used it so far, representing just over 4% of all UK landlords.

If you think you’ve underpaid tax, your first step is to notify HMRC. You’ll then have 90 days to work out what you owe and make the payment. Penalties range from 0% to 35% of the tax due.

If you fail to disclose and HMRC uncovers an issue, the penalties can be far higher - up to 100% - and criminal prosecution is a possibility.

Want to know more about the lettings services LRG can offer you? Call us on 01344 753100 and quote that you’re an NRLA member to find out more about the exclusive discount* we can provide.   

*subject to T&Cs, for newly instructed properties only 

We always advise seeking professional advice from a specialist tax advisor.