HMRC activity in the Real Estate sector

HMRC has ramped up its efforts to tackle tax non-compliance in recent years, and the new government is expected to boost HMRC funding in its first Budget as part of its commitment to closing the tax gap. 'Nudge' letters are often used to target non-compliance risks, which are informed by HMRC's large database of financial information and issued to taxpayers who may need to review and potentially correct their tax position.

Individual landlords

Educational nudge letters

HMRC may issue letters that prompt recipients to check that their affairs are correct with no response required, such as a recent campaign encouraging landlords to review expenditure claims. A thorough review of the client's tax position should still be conducted on receipt of such letters, and a record of the conclusion kept on file if no action is taken.

Let Property Campaign (LPC)

The LPC is one of HMRC's largest nudge letter campaigns and formal disclosure routes. It is aimed at individual landlords who need to disclose undeclared rental income from UK residential property. Although it cannot be used by companies or trusts, any landlord with undeclared rental income should seek specialist advice regarding a disclosure to HMRC to mitigate tax, penalties and interest.

Corporate landlords

Worldwide Disclosure Facility (WDF)

Nudge letters regarding offshore income and gains are triggered by information that HMRC receives under information exchange agreements with overseas tax authorities. This also includes income or gains derived from overseas property that may be taxable in the UK, depending on the taxpayer's residence status. The WDF can be used by individuals, companies and trusts who have income or gains deriving from overseas property to disclose.

Offshore corporates owning UK property

HMRC has compiled data received from land registry and the Common Reporting Standard (CRS), one of the largest international exchange of information agreements, to identify UK property owned by offshore corporate structures. HMRC has been contacting corporate owners throughout 2023 regarding Annual Tax on Enveloped Dwellings, Non-Resident Landlord and Non-Resident Capital Gains Tax obligations and tax liabilities, and although these letters are targeted at the corporate owner, UK-resident participators will also need to review their affairs to assess whether they may have any undisclosed liabilities.

It is vital that specialist advice is sought when any of these nudge letters are received, as an appropriate response must be submitted to HMRC within 40 days of receipt.

The register of overseas entities came into effect from 31 January 2023, which requires overseas entities owning or purchasing UK property to register with Companies House, identify their beneficial owners and file an annual update statement. This gives HMRC  even more information to identify corporate owners of UK property who may be at risk of non-compliance. In the lead up to the introduction of the register, HMRC already indicated that it would be using the data to drive one-to-one activity targeting property owners and entities which may be facilitating the concealment of beneficial ownership. Companies House have now started issuing financial penalties and warning notices to entities that failed to register by 31 January 2023. The UK government also launched a consultation in early 2024 to expand access to information on the register involving offshore trusts.

HMRC has indicated that it will be alert to a wide range of tax risks including overseas corporates that may have a UK presence, capital gains tax on disposals of UK property, SDLT liabilities, inheritance tax in relation to overseas trusts and the transfer of assets abroad anti-avoidance code designed to capture UK-resident participators with direct or indirect interests in the corporate structure. In addition, the new Labour government has pledged to close the tax gap by boosting HMRC funding in targeted areas, including offshore non-compliance. It is likely that HMRC activity in the real estate sector, particularly where there is an element of offshore ownership, will continue to increase.

If you would like to talk more on how these issues may affect you, please get in touch with John Cassidy, Caroline Fleet, or your usual Crowe contact.