HMRC no longer waits for landlords to declare rental income. It cross-references data from the Tenancy Deposit Scheme, letting agents, digital platforms and the Land Registry through its Connect system, and when that information does not match their tax record, it sends a nudge letter. If you’ve received one of these letters, it means that HMRC believes you have undeclared rental income. But don’t worry, you can take a few steps to rectify the situation and lower any potential penalties.
This article explains where HMRC gets its information on landlords, how its data-matching works, and what to do if a nudge letter arrives in your mailbox.
Key Takeaways
- HMRC can obtain information about landlords directly from third parties, including letting agents, the Tenancy Deposit Scheme and short-let platforms such as Airbnb
- HMRC uses its Connect system to analyse and cross-reference information from different sources, including third-party data and tax returns
- If the system identifies a discrepancy between the rental income HMRC knows about and the income you have declared, HMRC may send you a nudge letter asking you to check your tax affairs
- If you discover that you have under-declared rental income, making a voluntary and unprompted disclosure to HMRC will generally result in a lower penalty than waiting for HMRC to identify the error first
- If you can demonstrate that you had a reasonable excuse and the error was not deliberate, you may not have to pay a penalty
- How far back HMRC can assess under-declared tax depends on the circumstances – the normal time limit is four years, extending to six years where the loss of tax was caused by careless behaviour and up to 20 years where it was deliberate
- Living outside the UK does not necessarily put you beyond HMRC’s reach. HMRC can receive information about overseas landlords and their income through international information-sharing agreements, allowing it to identify UK rental income that may not have been reported
Where HMRC Gets Its Information About Landlords
HMRC gets information about landlords from third parties that hold records about property, rental payments and property transactions, as well as from its own data and international information-sharing arrangements. These sources can include letting agents, digital platforms and tenancy deposit schemes, alongside information HMRC obtains through its statutory data-gathering powers.
Lettings agents are a particularly relevant source for HMRC. Agents can hold records of the properties they manage, the landlords they act for and the rents and other payments they collect. HMRC can use its information-gathering powers to obtain information from businesses that manage land or receive rent on behalf of landlords. This can give HMRC a way to compare rental income reported by an agent with the income declared by the landlord.
Digital platforms like Airbnb and Booking.com are another important source. Under the UK's reporting rules for digital platforms, operators covered by the rules must collect information about reportable sellers and their transactions and provide specified information to HMRC. The rules came into effect from 1 January 2024.
Tenancy deposit schemes can also provide information that helps establish the link between a landlord and a rental property. Deposit protection schemes hold records relating to protected deposits, including information about the property, landlord and tenant. That information can form part of the wider pool of data available to HMRC, although it would be misleading to suggest that tenancy deposit schemes routinely send HMRC the rental income of every landlord.
HMRC can also obtain information from property and financial records held by other organisations where it has the appropriate legal basis to do so. This can include information relating to property ownership, transactions, financial accounts and other records that help HMRC establish whether a person's tax affairs accurately reflect their activities.
For landlords who live overseas, there is another layer of information available to HMRC. The UK participates in international information-sharing arrangements under which tax authorities exchange financial and other relevant information. These arrangements can give HMRC access to information held overseas, including certain financial-account information relating to UK taxpayers. Living outside the UK, using an overseas account or receiving UK rental income as a non-resident therefore does not, by itself, prevent HMRC from obtaining information about the income.
Taken together, these sources mean that HMRC does not have to rely solely on what a landlord puts on their tax return. It can compare information from different sources with the figures a landlord has reported and investigate discrepancies where the information does not appear to match.
What is HMRC’s Connect System?
HMRC Connect is the system HMRC uses to analyse and link information from different sources to identify potential tax discrepancies. Think of it as the point where the separate pieces of information HMRC collects about a taxpayer can be brought together and compared with their tax records.
For a landlord, those pieces of information can come from the sources discussed above. HMRC may have rental information from a letting agent, details reported by a digital platform and property information from another source. Connect allows HMRC to analyse those records alongside the landlord's tax information rather than treating each piece of data separately. HMRC has said its data-analysis systems can identify relationships and discrepancies across the information it holds about taxpayers.
That is where an undeclared rental income discrepancy can become visible. Suppose a letting agent reports £18,000 of rent paid to a landlord, but HMRC's records show only £10,000 of property income declared for the relevant tax year. The £8,000 difference does not prove that the landlord has underpaid tax (there could be a legitimate explanation), but it gives HMRC something to investigate. HMRC's data-gathering powers specifically allow it to obtain bulk third-party data, including rental income paid by letting agents to landlords.
This is why a landlord may receive a nudge letter even though they have never given HMRC the information mentioned in it. The information may have come from a third party and been matched against the landlord's existing tax records. If the resulting picture suggests that income may be missing or incorrect, HMRC can contact the landlord and ask them to check their position.
Connect does not decide that a tax error has occurred. It helps HMRC find the cases where the information it holds does not appear to match what the taxpayer has reported. The landlord then has the opportunity to explain the discrepancy, correct an error or confirm that their tax return is accurate.
What Does an HMRC Nudge Letter Look Like?
Here's a sample:
What Happens If HMRC Finds That You Have Under-Declared Rental Income?
If you have under-declared rental income, the penalty you face can depend on whether you correct the error before or after HMRC contacts you. According to HMRC's Let Property Campaign guidance, a disclosure made after HMRC has contacted you is treated as “prompted,” which generally means a higher penalty than an unprompted disclosure.
The difference can be significant. As set out in HMRC's factsheet CC/FS11, a non-deliberate failure disclosed more than 12 months late can attract a penalty of 10% of the tax for an unprompted disclosure and 30% for a prompted disclosure. Where the behaviour is deliberate, the penalty can reach 70%, while deliberate and concealed behaviour can attract a penalty of up to 100% of the tax owed.
The consequences can go beyond a financial penalty. HMRC can open a criminal investigation in appropriate cases and can publish the names of deliberate tax defaulters who meet the relevant conditions.
How Can Landlords Correct Undeclared Rental Income Before HMRC Acts?
For individual residential landlords who need to disclose previously undeclared rental income, HMRC's Let Property Campaign provides a specific route for making a voluntary disclosure. The process begins by submitting a Notification of Intent. HMRC then issues a Disclosure Reference Number and Payment Reference Number, usually within 30 days, after which you generally have 90 days to calculate what you owe and make the disclosure and payment.
There is also an important deadline to understand if you have only recently started receiving rental income. Under section 7 of the Taxes Management Act 1970, you generally need to notify HMRC of a new liability to Income Tax by 5 October following the end of the tax year in which the liability arose. If you fail to notify HMRC when required, the resulting failure to notify can be subject to penalties under Schedule 41 to the Finance Act 2008.
If you have already filed a tax return but the figures on it were wrong, the position is different. An inaccurate return can attract penalties under Schedule 24 to the Finance Act 2007, rather than being treated simply as a failure to notify.
The key distinction is therefore between not telling HMRC that you had a tax liability in the first place and filing a return that contains incorrect information. The sooner an error is identified and voluntarily corrected, the better the potential penalty position can be.
What Could Undeclared Rental Income Cost? A Worked Example
Consider a landlord who inherits a two-bedroom flat from a parent. Rather than selling it, he decides to keep it as a long-term rental. The property brings in £1,250 a month, or £15,000 a year.
He pays around £3,000 a year in allowable property expenses and has a mortgage on the flat. Because he is already a higher rate taxpayer through his employment, he assumes that the rent is largely being absorbed by the mortgage and does not realise that he still has a separate tax liability on the rental income.
Six years later, he discovers that he should have been declaring the rental income.
The first problem is the tax itself. Across six years, the property has generated £90,000 of gross rent. After allowable expenses and taking account of the Section 24 mortgage interest restriction, the Income Tax liability could be substantial. For illustration, assume the total tax due across the six years is £23,400.
But £23,400 is not necessarily the final bill.
HMRC can also charge late payment interest on the tax that should have been paid. The amount will depend on when each year's tax became due and the applicable interest rates, so the figure cannot be fixed in advance. If we use approximately £4,500 simply as an illustration, the running total would already be around £27,900 before penalties.
The next question is whether the landlord comes forward before HMRC contacts him.
Header | Come Forward Voluntarily | Wait for HMRC |
|---|---|---|
Tax Owed | £23,400 | £23,400 |
Illustrative Interest | ~£4,500 | ~£4,500 |
Illustrative Penalty | ~£4,680 | ~£7,020 |
Illustrative Total | ~£32,580 | ~£34,920 |
These penalty figures illustrate the difference between an unprompted and prompted disclosure for a non-deliberate failure that is more than 12 months late. They are not fixed rates that apply automatically to every case. The actual penalty depends on factors including the taxpayer's behaviour, the quality of the disclosure and the circumstances of the case.
The example also assumes that HMRC is entitled to assess all six years because the error was careless. If HMRC concluded that the landlord had deliberately failed to declare the rental income, the consequences could be much more serious – the assessment period can extend to 20 years, and the penalty range can rise substantially. In certain cases involving deliberate tax defaulters, HMRC can also publish the person’s name.
The lesson is not that every landlord who discovers an error will receive a £30,000 bill. It is that undeclared rent can become expensive very quickly once several years of tax, interest and penalties accumulate. Finding the problem yourself and correcting it before HMRC contacts you can put you in a better penalty position than waiting for HMRC to find it first.
What Rental Income Mistakes Put Landlords on HMRC’s Radar? The Sayrun Lamuth v HMRC Case
Not every rental income discrepancy HMRC finds is the result of deliberate tax evasion. Sometimes, a landlord simply misunderstands how the tax rules apply to their circumstances. The case of Sayrun Lamuth v HMRC [2025] UKFTT 00856 (TC) shows how an apparently straightforward misunderstanding can leave a landlord with years of undeclared rental income to sort out.
Lamuth was entitled to a share of the rent from a property but passed that money to her ex-husband. She believed that because she was not keeping the rental payments herself, she did not need to declare them. The tribunal rejected that assumption, stating that her tax position was based on her beneficial share of the rental income, not on who ultimately received the money. Passing her share of the rent to someone else did not remove her liability to account for it.
By the time the issue was resolved, Lamuth had filed five years of tax returns and paid £11,797 in back tax. The tribunal did, however, cancel the late payment penalties because it accepted that she had a genuine reasonable excuse.
The case was not about someone deliberately hiding rental income. It was about a misunderstanding. But it still resulted in a substantial tax bill.
Landlords need to pay attention to this case because similar misunderstandings can arise in other rental situations. Joint ownership is one example. Each owner generally needs to account for their share of the rental income, even if the rent is paid into a joint account or one owner receives the money on behalf of both. Another common misconception concerns the Non-Resident Landlord Scheme (NRLS) – being approved to receive UK rental income gross does not make that income exempt from UK tax.
These mistakes can also matter because HMRC does not rely solely on what a landlord puts on their tax return. Information about property ownership, rental payments and other aspects of a landlord’s affairs can come from third parties. If that information does not appear to match the income declared to HMRC, it can create the kind of discrepancy that HMRC's data analysis systems are designed to identify.
The lesson from Lamuth is therefore not that every mismatch means a landlord has deliberately avoided tax. An honest misunderstanding can still result in years of undeclared income, back tax and potentially penalties. What matters is recognising the error and putting it right before the situation becomes more serious.
Conclusion
An HMRC nudge letter is not something to ignore if it relates to your rental income. It may mean HMRC has received information from a third party that does not appear to match what you have reported.
That does not automatically mean you have deliberately done anything wrong. You may have misunderstood the rules, missed a property from your return or simply made an error. But once HMRC has contacted you, the disclosure is treated as prompted, which can mean a higher penalty than if you had come forward voluntarily.
Received an HMRC Letter & Unsure What to Do?
Let UK Property Accountants run the full Let Property Campaign (LPC) process for you. The Notification of Intent, the multi-year tax and interest calculation, penalty mitigation, and all HMRC correspondence. We act for landlords across the UK and overseas.
FAQs
An HMRC nudge letter is a targeted letter asking a landlord to check their tax affairs because HMRC’s information suggests that their rental income or other property-related information may not match what they have reported. Receiving a nudge letter does not automatically mean HMRC has concluded that tax has been underpaid, but it should not be ignored. If an error is found after HMRC has contacted you, any disclosure is generally treated as prompted, which can affect the penalty.
An HMRC nudge letter will normally explain why HMRC is contacting you and identify the tax issue it wants you to check. It may refer to the information that HMRC has obtained from another source and ask you to review your tax position. The letter could also explain what action HMRC expects you to take and how to respond. The exact wording and information will depend on the particular situation HMRC is writing to you about.
HMRC can obtain information from letting agents using its statutory data-gathering powers. HMRC specifically confirms that its bulk data collection includes rental income paid by letting agents to landlords. Digital platforms such as Airbnb can also be required to report information under the UK's Reporting Rules for Digital Platforms.
The normal time limit is four years from the end of the relevant tax period. This can extend to six years where the loss of tax resulted from careless behaviour, while a deliberate loss of tax can generally be assessed for up to 20 years. A separate 12-year limit can apply to certain Income Tax, Capital Gains Tax and Inheritance Tax losses involving offshore matters or offshore transfers. There is also a 20-year time limit where tax has been lost because of a failure to notify HMRC of a liability.
You can make a Let Property Campaign disclosure yourself, but using an accountant can be worthwhile if the disclosure covers several years, involves substantial rental income, joint ownership, overseas property, Capital Gains Tax or uncertainty about the correct figures.
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