Buy-to-let landlords facing tax crackdown
The taxman is believed to be planning a major crackdown on buy-to-let landlords who have failed to declare their rental income.
PKF Accountants & Business Advisers says HM Revenue and Customs has already sent warning letters to hundreds of buy-to-let landlords about taxes on their undeclared rents. As well as receiving backdated tax bills, offending landlords could also face fines for unpaid taxes dating back six years.
John Cassidy, tax investigations partner at PKF, said: “Over the last few years, HMRC has geared itself towards tackling tax evasion and avoidance and it intends to use the information it has to seek out evaders in a systematic fashion across the board. Those who did not receive a letter this week and believe they may have escaped the Revenue’s grasp should note that this is only a pilot exercise for ongoing interventions that will start later this year.“
Nationwide Building Society said many landlords could be at risk of backdated tax bills and fines because of ignorance over their tax obligations.
Andy McQueen, managing director of Nationwide’s buy-to-let lending division, said: "Essentially HMRC can use stealth tactics to find information on landlords who may not have declared rental incomes, including targeting lettings agents and reviewing stamp duty records.”
Data from mortgage lenders, compiled by trade body the Council of Mortgage Lenders, shows buy-to-let mortgages have now hit the one million mark, with 1,038,000 loans outstanding at the end of 2007. In the second half of 2007, banks and building societies lent a total of £24.1 billion in buy-to-let loans, up from £21.2 billion in the first half of the year and £20.8 billion in the second half of 2006.
If you are a buy-to-let landlord currently renting out a property then you will have to pay income tax on the rent regardless of whether you are making an overall profit or not.
Cassidy says many but-to-let landlords are confused about what they can deduct against their rental income. For example, many think mortgage payments can be deducted whereas in fact only the interest on loans is deductible.
According to HM Revenue & Customers, anything from letting agent’s fees to building and contents insurance to council tax can be deducted from your rental income. However, Cassidy warns that this is a grey area and landlords should get advice if they are worried about deducting too much or not enough.
He added: “Maintenance and repairs are deductible but improvements aren’t. This is because improvement is considered an investment, as it is likely to add value to the property. ”
|Potential deductable expenses|
|Letting agent's fees|
|Some legal fees|
|Buildings and contents insurance|
|Property maintenance and repairs|
|Rent and service charges|
|Other services (eg gardening)|
|Direct costs of letting the property (eg advertising|
Even if you are making a loss on a buy-to-let property you must still declare your earnings from rent for income tax purposes.
However, losses one year can actually benefit landlords the next. Lee Grandin, managing director of buy-to-let specialist Landlord Mortgages, said: “Landlords can carry forward any losses each year and deduct these against their rental income.”
When you come to sell your home then remember that you may have to pay capital gains tax. From 6 April 2008, new CGT rules will come into force meaning anyone selling a property that isn’t their primary residence will be taxed 18%.
More and more people are buying second homes for weekend or holiday retreats. Although everyone’s primary residence is exempt from CGT, second homes will attract this tax when they are sold regardless of whether they have been rented out or lived in by the owner.
If you buy a second home then you have a window of two years to decide which property you want to elect to be your primary residence and which one you want to pay CGT on. This can be changed later on as long as you are prepared to transfer your electoral and postal details.
The period of time that a property is elected as your main residence is exempt from CGT, as are the last 36 months of ownership. And if you have previously rented out your main residence then you can claim up to £40,000 (or £80,000 if you own the property with another person) of letting relief.
Cassidy says that many developers are so focused on trying to jump on the bandwagon and make a profit on property that they don’t remember to consider the tax implications.
Property development (buying a property to do it up and sell) is considered by HM Revenue & Customs as a trade and is therefore liable for CGT rather than income tax.
In addition, VAT may also apply. Cassidy recommends that developers keep every receipt for the cost of renovations in order to reduce the VAT bill.
If you buy a property abroad then you are still liable to pay income tax and CGT on it in the UK. And you may also have to pay equivalent taxes in the country you have bought in, so it’s well worth doing some research before stumping up for the home in the sun.
Cassidy said: “Some European countries, such as France, also charge home owners wealth taxes. Many people don’t realise the extent of tax issues when buying abroad but these should all be considered before buying.”
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
Does exactly what it says on the tin: covers the contents of your home for theft and damage and also may insure certain possessions (jewellery, cycles) outside of the home. Things to watch for include the excess and also the maximum payout on individual items. Another grey area is kitchen fittings, as some contents policies say these are not contents but part of the fabric of the property and covered by buildings insurance and some buildings policies don’t cover them because they regard them as contents.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.