Is HMRC Cracking Down on Scottish Property Investors?

Scottish property investors are under greater scrutiny from HMRC as tax enforcement is tightening across the UK. New evidence shows how compliance problems remain a problem for landlords in Scotland, with undeclared rental income being a leading priority for the taxman.

Recent findings of HMRC's Let Property Campaign reveal close to £250 million brought in from landlords who hid their rental income in the last decade — albeit still short of the initial £500 million projection. The new tax campaign is a bad time for Scottish landlords, already facing increased tax burdens, including increased Additional Dwelling Supplement (ADS) from 6% to 8% on buying property, launched in December 2024.

This increase in tax collection is occurring at a time of increasing difficulty across Scotland's rental sector. The Scottish Association of Landlords has lamented that increasing taxation and ongoing regulatory turmoil are deterring numerous investors from the sector.

How Complex is the Tax Environment for Scottish Landlords?

However, to navigate Scotland's tax environment is still very complex. Landlords have several obligations to fulfil that include Scottish Income Tax rates, rental income taxes prevalent throughout the UK, and devolved property taxes such as Land and Buildings Transaction Tax (LBTT) and the ADS.

The experts note that this creates particular challenges for Scottish investors, subject to income tax rates that are generally higher than across the rest of the UK, and other property taxes not imposed south of the border.

De-centralised hotspots like Edinburgh and Glasgow have been pinpointed for more intense scrutiny, both by HMRC enforcement officials and local compliance staff.

Let Property Campaign Progress

The Let Property Campaign report by HMRC — a disclosure program that was originally initiated in 2013 — shows thousands of landlords have gone on record with voluntary disclosures so far. Voluntary disclosing non-compliance is charged penalties between 0% and 35%, while those who are investigated without disclosure can be charged as much as 100%.

It is believed that up to 1.5 million landlords across the UK may still not be compliant in full — a figure that is likely to include many Scottish investors. Tax experts caution that although voluntary disclosure remains the least expensive way of putting things right, HMRC's new tougher line is closing the door on leniency.

Challenges Unique to Scotland

Scottish property investors must also contend with the further complications generated by the interaction between UK-wide taxation rules and devolved Scottish taxation. Rental profits remain subject to Scottish Income Tax, which for most earners is higher than anywhere else in the UK.

While purchases of Scottish properties have more in tax. The increased 8% ADS is a significant tax burden versus the 3% Stamp Duty surcharge on England. Industry groups have called for the ADS rise to be reconsidered on the grounds that tax rises are driving landlords out of business and worsening the supply shortage in Scotland's housing supply.

Conclusion

HMRC is also stepping up their tax enforcement efforts by planning to hire an additional 5,000 staff in five years' time to help bridge the near £40 billion yearly tax gap. Tax prosecutions across the UK recently reached a three-year high, with 300 prosecutions recorded by September 2024.

In Scotland, the national effort is backed by Revenue Scotland activity, which deals with compliance in devolved taxes such as LBTT and ADS. Scottish landlords thus now have to contend with a more complex and forward-thinking compliance environment.

Tax specialists warn that speedy action and expert advice are more important than ever for Scottish buy-to-let landlords who don't want to avoid costly fines. By getting tax issues sorted out proactively, property owners can better manage both UK-wide rental income requirements and Scotland's unique property tax environment.