What are the risks of renting a property off the books?
Renting a property is a legal process – and avoiding it has consequences, both financially and personally.
New landlords may be tempted to avoid declaration for many reasons – from misconceptions about what’s involved to a fear of tax consequences or a heavy administration burden.
But renting a property the right way and becoming a landlord isn’t as difficult as it seems. There are checks and balances to make, but there are ways to simplify the process and stay protected.
In this article, we’ll explain what an undeclared rental is and what the consequences are of renting informally or “off the books”.
What counts as an undeclared rental?
Renting a property “off-the-books” means renting without a written, legally binding lease agreement. This could be letting someone live in your home or a second property (that you own but don’t live in) for a charge.
An “undeclared rental”, on the other hand, is a property that is rented for a charge – including spare rooms or holiday lets – when the owner does not declare the income earned to HMRC.
There is a difference between informal renting vs deliberate tax evasion. Informal renting can be legal, as it can mean you have an informal agreement between you and the renter.
However, you still have to comply with all legal responsibilities, including landlord regulations and tax rules. You also have to comply with the agreements of your mortgage, if you have one.
Whereas an undeclared rental is illegal, and there are financial and criminal consequences if you get caught.
What are the legal risks for landlords?
There are legal risks to landlords of informal renting.
Firstly, if you don’t comply with tax rules, you can be prosecuted for tax evasion. Secondly, even if you declare the income to HMRC, you can still be prosecuted for being an illegal landlord.
Tax evasion risks
Collecting income from a tenant is taxable income that must be declared. You must check what applies to you with HMRC and/or a verified tax accountant. The tax you have to pay will vary depending on whether you have other income or another job.
If you’re renting “off the books”, you have potential criminal liability for tax evasion, which includes:
- Criminal prosecution – Landlords can face imprisonment for repeated or serious cases of tax evasion.
- Naming and shaming – HMRC can publish your details if you evade over £25,000 in tax intentionally, which can negatively impact credit ratings, business activities, and business reputation.
HMRC can look back at your last 20 years of tax assessments and income – utilising digital tracking as needed – to determine if tax has been evaded, which can lead to high repayments with interest.
Illegal landlord risks
Even if you declare your earnings to HMRC, you can still be prosecuted as a landlord for not complying with housing laws, safety regulations, and licensing requirements enforced by your local council.
Some criminal offences include:
- Renting an unlicensed HMO (House in Multiple Occupation) – Which means renting to multiple tenants without a license from the council.
- Safety violations – For example, if you fail to provide valid gas safety certificates, electrical checks, or fire safety measures for your tenants.
- Illegal eviction and harassment – If you remove a tenant without following the correct legal procedures (like serving notices), you can face prosecution.
What are the financial consequences?
There are significant financial consequences to renting a property “off the books”, without following tax laws or landlord rules and regulations.
For example, if you evade tax and don’t declare earnings to HMRC, you could face:
- Repayment of tax owed – Dating back up to 20 years
- Interest – Which is added to all unpaid tax
- Non-deliberate error penalties – Which range between 10% to 30% for accidental tax mistakes
- Deliberate penalties – If HMRC finds that tax evasion was deliberate, penalties can be 30%-100%, or up to 200% for offshore income
Even if you pay tax on your rental income, you may also face financial penalties for being an illegal landlord. For example, this can include:
- Unlimited fines from councils – Councils can take you to court to claim unlimited fines from you
- Rent Repayment Orders (RRO) – Tenants can reclaim up to 12 months’ rent via a tribunal application
Additionally, you can face other financial losses as an unregulated landlord. For example, you can see:
- Loss of tax benefits – Such as tax credits on mortgage interest, property allowances, and Capital Gains Tax relief.
- Loss of rental income – For example, if the tenancy is immediately terminated by enforcement agencies.
Risks related to tenant management
You aren’t as protected when renting a property off the books. Without a written agreement, it’s difficult to evict tenants, reclaim unpaid rent, or take tenants to court for things like damage to your property.
When renting informally, landlords are at risk of the following:
- Inability to enforce the tenancy agreement in court – With no formal or written agreement, you won’t be able to take the tenant to court if they breach your agreement and/or cause you financial loss.
- Difficulty evicting the tenant legally – With no enforceable contract, legal support or any legal grounds to evict the tenant will be difficult. Notifying authorities could also flag your illegal landlord status to prosecutors or HMRC.
- Increased vulnerability to tenant fraud or unpaid rent – Tenants who are aware of your informal arrangement can take advantage, leaving you in a vulnerable situation.
Insurance and safety issues
As a landlord, normal home insurance won’t cover a rental property. If you’re renting your residential home, you’ll need to notify your provider. This may increase your premium, but it’ll mean you are covered in the event of an issue.
If you don’t notify your insurance, it can mean:
- Your home insurance policy is invalidated when you make a claim – This applies even if the claim is unrelated to the tenant or lodger.
- You aren’t covered for damages, accidents, or liability claims – If you need to claim on your insurance for any reason, you won’t be covered if you don’t have the right insurance.
You can get landlord insurance as well as home insurance for a rental property. Landlord insurance isn’t mandatory, but it can further protect you against the risks of unpaid rent, tenant damage, or other financial losses related to a rental property.
Learn more about landlord insurance and if it’s worth it.
Impact on property compliance and future sales
When it comes to selling your property in the future, you may have difficulty if you’ve been renting off the books.
Selling a property is a legal process, and if you’ve been evading tax or acting non-compliantly, the procedure of sale can flag these issues to HMRC and law enforcement.
Some solicitors may ask for details or records of any tenancy during the sale process. If these cannot be provided, this can lead to additional enquiries, delays, or the need for explanations or indemnity insurance, which may increase the risk of scrutiny from HMRC.
FAQs
Is it illegal to informally rent my property?
It depends. Renting informally is a nuanced area and there are rules to consider. The rules also vary depending on whether you’re informally renting a home you live in or if it’s a second property.
For example, if you have a mortgage, your lender will have rules about letting someone live with you long-term. This could be things like notifying them about who is living with you, or drawing up an agreement for the living arrangement.
If you own your property outright, you won’t need to notify a lender, but you’ll still need to comply with any relevant legalities. For example, if the person is a lodger, you’ll have some legal responsibilities as a landlord and you may have to declare tax on the income.
Is it worth renting a property informally?
There are huge risks to renting informally. You still need to follow the law and meet your obligations as a landlord, and this can be very difficult to achieve when you aren’t set up properly as a landlord.
Plus, there are other risks to you, even if you tick all the legal boxes. When you rent informally, you aren’t as protected by the law, and this could cost you financially.
For example, evicting bad tenants becomes more challenging, and your arguments may not stand up in court if you’ve never had a formal tenancy agreement.
There are also many benefits to becoming an official landlord, like tax benefits and relief. Learn more about the tax benefits of being a landlord.
Is it difficult to set up as a landlord?
It takes work, but setting yourself up as a landlord isn’t as daunting as it seems. There are legal obligations to consider and contracts to draw up, but once you’re organised, it’s simply maintenance.
Setting up as a landlord is easier if you have help. For example, you can use property management software, which helps you store all important documents, track certifications/expiry dates, and monitor income/expenditure to support tax returns.
You can also use digital templates for tenancy agreements and other important tenant documentation, like eviction notices. Learn more about the benefits of property management software.
Or you can hire a letting agent, who will usually charge a flat fee or a percentage of the rental income to manage the tenancy on your behalf.
Renting a property off the books : things to rememer
- Renting a property informally isn’t necessarily illegal, but you’ll still need to take some action to avoid breaching mortgage terms, home insurance contracts, and landlord regulations.
- Not declaring the income earned from renting a property – including spare rooms and holiday lets – is tax evasion, which can result in fines, repayments with interest, or imprisonment.
- Operating as an illegal landlord also brings unlimited fines and potential prosecution, including if you operate without a license or don’t keep safety certificates up to date.
- Setting up as a landlord protects your finances and can be made simpler with property management software – which provides templates and tracks income for tax returns – or by hiring a letting agent.
